WILL AI CONTINUE TO DOMINATE GLOBAL EQUITY MARKETS?
Posted on January 27th, 2025
Prior to Microsoft’s $10bn cash injection into ChatGPT’s creator OpenAI in January 2023, most people’s views on AI had been limited to Hollywood’s dystopian interpretations. But everything changed when the then-second biggest company in the world double-knotted its future to AI’s development, committing to weave the technology into its ubiquitous software products. That caught the attention of average investors, many of whom had already profited handsomely from Microsoft’s stunning transformation from a slow-growing software business to a rapidly growing cloud services provider. Microsoft’s backing dropped AI into the mainstream and sparked an investor frenzy. The explosion of AI, and its ripple effect across companies from Nvidia to semiconductor firms, has been among the biggest stories in global equity markets in recent years, but how long will it last?
What’s driving the AI boom?
Since 2020, AI’s development has been dramatic. At the centre of it all are facilitating technologies – the picks and shovels – like graphics processing units (GPUs) and data centres. Ironically, neither of these technologies were advanced with AI primarily in mind. But rapidly increasing computing capacity, along with faster and more powerful GPUs, have been the key ingredients that brought software like ChatGPT to the boil. Said another way, AI’s models needed powerful GPUs to make them useful, but they’d be pointless without the massive data centres providing the capacity to run them. It’s noteworthy too that advancements in the reduction of computing costs have been running out of steam – other options are needed to lower the cost of computing enough so that major technological breakthroughs like AI can happen. That’s where GPUs come in.
“The explosion of AI and its ripple effect has been among the biggest stories in global equity markets in recent years…”
Since ChatGPT 3 burst onto the stage, there’s been several new and improved iterations, more than a few lookalikes, as well as a load of startup AI-native applications. All of that requires exponentially more GPUs and data centres. Unsurprisingly, then, it’s been the stock prices of Nvidia, Microsoft and other cloud providers, as well as a range of other and semiconductor firms riding on the theme’s coattails that have soared.
Will AI continue to soar?
As far as the next couple of years are concerned, it doesn’t take a lot of imagination to conjure a scenario where agents on our phones are booking hotels, flights, dinner reservations and doing the shopping, all with minimal human input. In the office, our AI agents will literally be our assistants, grabbing data from here, dropping it into a chart over there, and making sure the latest presentation has been sent to everyone’s inbox, again with limited human number crunching. As an investor I still build plenty of spreadsheets, and I can’t wait for AI to do it all for me.
Most of this, though, is just an extension of what’s already happened, and will simply require more and better versions of what we already have. That gives me confidence that the picks and shovels part of the journey isn’t over. After all, stock frenzies tend to get completely out of hand before things really go south, and with Nvidia’s stock on 30x price to expected earnings, its valuation is hardly incomprehensible – especially when you consider that Walmart (not exactly a technology company) traded on 55x price to earnings in 1999 at the peak of the last craze.
Looking further out, it’s just too tough to know how AI will change our worlds, so I don’t think it makes a lot of sense trying to figure out – and invest behind – the next big thing. There’s time to sit back and wait. Revisiting the arrival of the internet comparison, in 2000 very few invested in Apple based on an anticipated explosion in smartphones, or Microsoft because it would become the second largest data centre provider in the world – both of which wouldn’t have been possible without the internet. The point is that the real impact of any major technology adoption often takes years to surface.
So, in the Border to Coast view, a positive medium-term outlook on AI isn’t down to any tomorrow’s-world-like predictions.
Instead, it’s based on a belief that every company, in every sector, will reap some sort of gain from the technology. That could be a bit of productivity-driven cost saving, or some incremental revenue opportunity. But when taken together, the impact could be big enough to point to profits in the overall market that are likely to be better than most expect.
“A positive medium-term outlook on AI isn’t down to any tomorrow’s-world-like predictions. Instead, it’s based on a belief that every company, in every sector, will reap some sort of gain from the technology…”
There’s plenty of risks to that view, of course. Global economies could plunge and throw a spanner in the works. Geopolitics is a wildcard which could upend any reasonable profit outlook. But all other things equal, I think there’s enough wind in the AI sails to keep the market drifting higher. And that’s a comfortable place to be while waiting for the next life-changing impact the technology is bound to serve up.
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