AI Frenzy Affect Investment Patterns
Investing in AI is no longer just a matter of investing in companies that use the technology. Increasingly, investors are looking at how the businesses they invest in will deploy artificial intelligence, which can help improve productivity and boost profit margins. This could potentially lead to an industry-wide M&A frenzy as businesses look for new avenues of growth and leverage their existing assets.
One example of this trend is a burgeoning company that uses an AI to identify patterns in unstructured data. This can be useful for financial market participants, as it can identify correlations between obscure economic indicators and stock price movements that humans may miss.
The technology is also being used in more traditional sectors, as firms seek to gain a competitive edge by using the technology to improve efficiency and drive cost reductions. In one recent study, we found that old economy firms that employ a high share of AI Frenzy outperformed their non-AI-intensive peers on a market and sector-neutral basis.
How Does the AI Frenzy Affect Investment Patterns?
This AI-driven M&A frenzy is likely to be driven by the accelerated progress in generative AI, which will enable machines to learn from data and perform tasks without being programmed, with a potentially profound impact on human jobs and the economy. In fact, according to a recent survey by EY, the majority of U.S. CEOs believe that generative AI will transform their business over the next five years, driving revenue and profits. This has led to a wave of optimism among tech investors, with the Nasdaq 100 Index up nearly $5 trillion in value this year and chipmaker Nvidia Corp, which makes graphics processing units (‘chips’) that are key for AI applications, up more than fourfold.
Investors have poured a record amount of money into technology stocks, including the AI-related ones, since 2022. But the market’s high expectations have cooled in recent months, with some tech stalwarts like Nvidia suffering from multiple compression and earnings warnings.
It’s not surprising, given the speed at which the hype has cooled, that some investors are pulling funds with an investment focus on AI-related stocks. The withdrawals are the fastest since 2016. However, alongside the excitement, there is also a growing sense of unease about the implications of widespread AI adoption. One concern is the potential impact on jobs and the workforce.
As AI systems automate tasks traditionally performed by humans, there is a fear that millions of jobs could be displaced, leading to economic upheaval and social dislocation. While some argue that AI will create new opportunities and industries, others worry about the widening gap between the technological haves and have-nots.
The fast fading of the AI frenzy is likely to have an impact on investment patterns. For instance, many small-cap ETFs are underweight AI, with the Russell 2000 only having 9% exposure to AI stocks. This underweighting reflects the disproportionately higher returns enjoyed by larger firms that can justify greater investments in AI, thanks to their superior proprietary datasets and customer bases. But if AI-related M&A heats up, it is likely that these underweighted small-caps will struggle to keep up.