Sean Williams, The Motley Fool
4 min read
For the better part of the last four years, artificial intelligence (AI) has been Wall Street’s leading catalyst. Empowering software and systems with the tools to make autonomous, split-second decisions is a multitrillion-dollar global addressable opportunity that’s lifted the Dow Jones Industrial Average (DJINDICES:^DJI), S&P 500 (SNPINDEX:^GSPC), and Nasdaq Composite (NASDAQINDEX:^IXIC) to new heights.
While it’s easy to look at AI growth estimates and assume there’s no end in sight to the infrastructure build-out, this would probably be a mistake. Based on several historical factors, the puzzle pieces for an AI bubble-bursting event appear to be falling into place.
Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a “Double Down” signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same “Total Conviction” signal is flashing for a company 1/100th the size of Nvidia. Continue »
Image source: Getty Images.
Game-changing technologies seemingly always endure early-stage bubbles
The historical puzzle piece that arguably hasn’t moved for years is the idea of game-changing technologies enduring early-innings bubble-bursting events. For more than three decades, every major tech innovation, including the internet, eventually dove off the proverbial precipice.
The reason these bubbles form is that investors consistently overestimate the pace of adoption and/or optimization of game-changing technologies. While the otherworldly spending on the AI data center build-out indicates that there isn’t an adoption problem, it’ll likely take years before businesses understand how to optimize AI solutions to maximize sales and profits.
Don’t forget, internet-driven businesses didn’t truly mature until several years after the dot-com bubble burst.
Persistently elevated inflation can stop the music on Wall Street
Another puzzle piece that threatens to bring the AI revolution to a grinding halt is persistently elevated inflation.
In addition to President Donald Trump’s tariffs and the Iran war driving up consumer prices, the Federal Open Market Committee (FOMC) has specifically labeled the AI infrastructure build-out as inflationary. Although the overwhelming demand for AI hardware and persistent supply shortages are boosting the pricing power of AI-based businesses, the downside is that higher prices are working their way down the chain to consumers.
The most logical way to deal with persistently elevated and entrenched inflation is for the FOMC to raise interest rates. But making borrowing costlier for a technological revolution that’s been financed in part by debt can reset growth and valuation expectations.
