Is Artificial Intelligence Experiencing a Surge, a Burst, or a Controversy? The Data Offers Insights
Everyone's aware that the stock market's recent remarkable surge is primarily driven by seven primary stocks: These are often referred to as the "Phenomenal Seven", including Alphabet, Amazon, Apple, Facebook (now Meta), Microsoft, Nvidia, and Tesla (arranged alphabetically).
Most, if not all, of these companies are widely believed to be gaining from the extraordinary growth of artificial intelligence. The "Phenomenal Seven" collectively have a market value exceeding $17 trillion, and they contributed more than half of the S&P 500's total return in 2024. Over the past five years, each of these companies has seen an annualized growth rate of 20% or higher, with Tesla achieving 73% and Nvidia surpassing 90%.
Is this trend sustainable? What's the end game? And what does this artificial intelligence boom, which seems to be the driving force behind the seven's success, suggest?
Two years ago, I published an article on our site discussing Sam Bankman-Fried, FTX, and the bitcoin craze. At that time, the price of a single bitcoin was around $20,000, whereas it's now hovering around $100,000.
Just like then, the question on everyone's mind was: Is bitcoin a boom, a bubble, or a scam?
Recently, the Wall Street Journal's Vicky Ge Huang compiled warnings given by some of the world's most prominent investors about cryptocurrencies like bitcoin. Despite these warnings, the $100,000 valuation indicates that we're not taking heed. JPMorgan Chase CEO Jamie Dimon once called bitcoin a worthless "pet rock," while Citadel CEO Ken Griffin questioned, "What issue does it address for our economy?"
But what about AI? Is artificial intelligence something that expert investors are beginning to suspect might be another bubble, and we're simply ignoring that risk? Or is AI a genuine boom, and the question is when—and how—the "crash" occurs?
In my view, AI is a legitimate investment opportunity, offering the potential for large returns. From medical advancements to content creation breakthroughs or advancements in computer science, AI is already altering the workforce, and there's no sign of the innovation slowing down.
However, will the returns be significant or likely enough to warrant the significant investment required to join the game? That's where I become more skeptical. There's a long list of things that need to occur for the value creation assumed by today's AI prices to materialize:
- A solution must be found for the energy consumption issue. Even today's AI requires more energy than America can generate and distribute. Yet, Americans are struggling to invest in either. Who will?
- A solution must be developed for the data training issue. The amount of data required for fourth- and fifth-generation AI models is already far beyond the internet's total data volume, and the energy requirements continue to rise exponentially as we add new data sources.
- The "killer app" that becomes a must-have needs to be identified. What consumers will purchase will ultimately generate returns on investments in energy generation and distribution, but the product that provides the greatest returns remains to be seen.
- The clamor for government regulation will intensify as AI displaces jobs, but we're unsure of the impact of intellectual property laws on the use of copyrighted content. This question will be resolved in the legal and political arenas, with potential unintended consequences for AI research and development.
One thing is certain: AI is a highly transformative technology, but scale will be crucial in addressing these problems. The market will only want—and can only afford—a few surviving players. As competition leads to commoditization, affordable pricing and the ability to "stay current" will be essential for survival.
As ever, a select few investors will make substantial profits either by surfing the wave and exiting at the right time or by backing one of the ultimate survivors and holding on for the ride. Countless start-ups and venture capital firms will suffer 100% losses as they struggle with scale or fail to stay within the competitive envelope.
However, all evidence suggests that AI is neither a bubble nor a scam; it's a boom with long-term potential. While there's irrational excitement around AI, that's the free market's way of experimenting and learning, which has always given the U.S. economy its edge. AI's biggest winners will offer solutions to real problems and create new forms of competitive advantage, and we should be prepared for those benefits to emerge within the next few years. On the other hand, hindsight may become 20-20 for the losers who assumed it was a "sure thing."
When only a few numbers will emerge victorious, I don't see anyone winning by spreading their bets indiscriminately. AI will be a long-term winner for a select—and potentially magnificent—few who successfully sell their products with scale to customers who are willing to pay for the cost and productivity gains they'll create.
The extraordinary growth of artificial intelligence (AI) is widely attributed to companies like those in the "Phenomenal Seven", and experts are debating whether AI is another investment bubble or a legitimate boom with long-term potential. Although AI requires significant energy and data, it's already transforming various industries, such as medical advancements and content creation.
Despite the challenges, such as energy consumption and data training issues, some investors view AI as a legitimate investment opportunity with the potential for large returns. However, the question remains whether these potential returns will be significant enough to warrant the significant investment required to join the game.
