Jim Covello, Head of Global Equity Research at Goldman Sachs, has recently poured cold water on the AI concept, which has been a major driver of this year’s rise in U.S. stocks.
With over thirty years of experience on Wall Street, Covello knows well how painful it can be to go against the ever-inflating tech bubble. The market has a way of creating wealth month after month, even when the latest technological breakthroughs fall short of expectations. Covello believes this could also be the case with AI, making it dangerous, even foolish, to start shorting companies like Nvidia now.
Covello believes that it might not be this year or even next year, but eventually, the bubble will burst. In his view, the billions of dollars being poured into AI by companies will not spark the next economic revolution and may not even match the benefits brought by smartphones and the internet. When this becomes clear, all the stocks that have surged due to AI prospects will also fall.
In his report, Covello pointed out:
“Historically, most technological transformations, especially those that are revolutionary, replace very expensive solutions with very cheap ones. The idea of using highly expensive technology to replace jobs is almost completely contrary to this trend.”
“What trillion-dollar problem is AI going to solve? Using expensive technology to replace low-wage jobs is the exact opposite of the technological transformations I’ve seen in the past thirty years of closely watching the tech industry.”
Covello argues that for AI to justify its high costs, it “must be able to solve complex problems, which is not what it was designed for.” AI technology is very expensive, and even using machine learning to replace humans doesn’t reduce costs.
Covello’s report states, “We found that updating historical data in our company model with AI is faster than manual updates but costs six times as much.” He also noted that costs must come down significantly for the public to afford AI-automated tasks.
AI supporters believe that AI technology is still in its early stages, much like the internet during the dot-com bubble of the 1990s, and that costs will eventually come down. Even so, Covello points out that the internet still had a cost advantage. “Amazon could sell books at lower costs than Barnes & Noble because it didn’t have to maintain expensive physical stores.”
Covello said, “The idea that technology starts out expensive and then gets cheaper is a revision of history.”
Covello’s concerns aren’t just about high costs. He simply expects that AI won’t become the breakthrough technology people hope for. So far, AI has not produced a “killer app,” a fact even his more optimistic colleagues at Goldman Sachs have acknowledged in their reports.
According to media reports, since the end of 2022, the AI frenzy has driven up the market cap of the S&P 500 by nearly $16 trillion. Now, Covello and a small but growing group of market observers are questioning the key principle of the AI concept. This principle is that the powerful capabilities of large language models (LLMs) will usher in the next great phase of capitalism, with corporate profits booming as more jobs are handed over to intelligent machines, thereby improving efficiency and accelerating growth.
Covello and other skeptics argue that the commercial expectations for AI technology may be vastly overblown. If tech giants rethink their massive investments in AI, the stock market could see a pullback.
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