July 21st, 2023 7:00am PDT
In a cautious message on Monday, strategists at JPMorgan Chase expressed concern about the widespread surge in stocks driven by the hype around artificial intelligence. They warned that this frenzy could be at risk of a significant decline. Despite the surge, the world’s largest bank tempered expectations, noting that AI hasn’t had a substantial impact on most companies’ financial performance just yet.
Even though investors have shown strong confidence in the stock market, JPMorgan’s chief markets strategist, Marko Kolanovic, and his team presented a more cautious stance in a recent report. They expressed concerns about a potential bubble inflated by hype surrounding technology, specifically chatbots with limited capabilities that lacked concrete evidence of AI-driven earnings growth.
JPMorgan forecasts a widespread market decline, citing factors such as the effects of rising interest rates, decreased personal savings, and an unsettling geopolitical climate. These factors collectively contributed to the stock market’s poorest performance in more than ten years during 2022.
The S&P 500 has witnessed considerable growth in the current year, largely propelled by prominent AI companies such as Nvidia, Alphabet, and Microsoft. These companies alone have contributed to $1.9 trillion worth of gains. However, analysts from Goldman Sachs argue that this concentration of gains could potentially spark a more widespread rally among other stocks that have not yet experienced such rapid growth.
It is worth noting that JPMorgan’s Kolanovic suggests commodities as an attractive investment option. He points out that they are currently undervalued, have low ownership, and are backed by strong fundamentals and technical analysis. This view comes at a time when significant economic and financial news, such as the Federal Reserve’s interest rate decision and earnings reports from tech giants Alphabet and Microsoft, has been dominating the headlines.
Tips to Side Step the AI-Driven Bubble
- Gain knowledge: Dedicate time to learn about AI, its applications across various sectors, and its implications for businesses and society. Become acquainted with the technology, including both its capabilities and limitations.
- It’s important to avoid concentrating all your investments in AI-related stocks or sectors. Instead, diversify your portfolio by allocating your investments across different industries and asset classes. This strategy helps spread out the risk and reduces exposure to potential bubbles.
- Pay attention to the basics: Look for companies that have strong foundations, stable financials, and a clear and sustainable competitive edge. Take into account factors beyond just AI capabilities, such as management expertise, market position, and revenue growth.
- Evaluate Practical Use: Look for companies that have successfully implemented AI in real-world scenarios and are reaping the benefits. Avoid companies that merely use AI as a trendy term without any substantial applications or outcomes.
- Focus on Companies with Revenue Growth: When evaluating potential investments, prioritize companies that have a proven track record of revenue growth due to their AI applications. Exercise caution when considering companies that make bold promises without substantial evidence of actual revenue generation.
- Valuation Assessment: Exercise caution when considering companies that have disproportionately high valuations compared to their current earnings or revenue. It is important to compare the valuation with other companies in the same industry and historical metrics to determine if it is reasonable.
- Take into account ethical and regulatory considerations: Assess how companies that utilize AI address ethical issues and navigate regulatory hurdles. Companies that actively engage with these concerns may be better equipped for long-term success.
- Stay informed on the latest trends in the AI industry and their impact on various sectors. By staying updated, you can make better investment decisions based on well-informed insights.
- Stay clear of emotional investing. Don’t let the fear of missing out or hype impact your investment decisions. Instead, make well-thought-out choices based on careful analysis and your long-term investment goals.
- Get Expert Advice: If you’re unsure about investing in AI or need guidance, it’s recommended to consult with a knowledgeable financial advisor or investment professional who specializes in this field. Their expertise and personalized insights can be invaluable in making informed decisions.
- Take a Long-Term View: It is advisable to avoid pursuing immediate gains in the AI market. Instead, adopt an investment approach that emphasizes sustainable growth and the creation of long-term value.
It’s important to keep in mind that investing always involves risks, especially when dealing with rapidly evolving technologies like AI. It’s crucial to approach investment decisions cautiously and thoughtfully. By following these tips, you can minimize the risk of falling into an AI-driven bubble and make well-informed investment choices.