Opinion | With AI looking increasingly like a liability, a storm is coming

A recent Financial Times front-page lead, headlined “Tech stocks suffer $1.2tn AI sell-off”, was followed a few days later by a comment elsewhere that tech stocks were the only cloud over an otherwise sunny Wall Street. Weather forecasters would be ashamed of such a simplistic assertion.

Artificial intelligence and, more generally, tech stocks have become the great overarching gods that dominate the stock market firmament. To suggest they are immortal and the investment sky will remain blue even as they are toppled is naive to the point of being fatuous. It never rains but it pours, to use more mundane language.

And it will rain most heavily on Wall Street where tech and AI fever has reached the point of delirium. The Tokyo stock market, which has benefited from investment flows leaving the United States, will provide a temporary haven. But the typhoon will spread its skirts before long.

That tech stocks shed a cool trillion dollars in the space of a week should be enough to send investors running for cover from an approaching storm, and it will not be simply paper wealth that is destroyed. The negative wealth effect of tumbling stock prices will ramify throughout economic and financial systems.

US$1 trillion may not seem a disaster against the total capitalisation of some 770 tech stocks globally (of which AI chipmaker Nvidia accounted for US$5 trillion until recently). But apart from the sudden speed of the price slide, the AI sector’s profit outlook is worrisome.

It is reminiscent of the situation with IT stocks some 25 years ago when stock price valuations for many companies in what was then the ultra hi-tech information technology sector reached super-high levels, way ahead of profit projections. Some IT companies were actually loss-making but that did not deter fevered investors. The IT bubble consequently collapsed, dragging down most other stocks with it.

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