Is AI a Bubble?

The most common question we’ve been getting from clients these days is whether artificial intelligence (AI) is a bubble. It’s worth noting that “bubble” is a tricky word. We often apply it only after prices have already fallen.

For instance, in 1996, the Internet looked expensive. An investor who sold on that view missed four more years of gains. In 1999, the internet also seemed expensive, and that concern proved warranted. Same signal, very different outcome. The bubble label is obvious only in the rearview mirror. 

The Case for Caution is Real

So let’s look at what we actually know. Roughly 10 companies make up more than one-third of the S&P 500, up from about a quarter at the peak of the dot-com era. Spending on data centers and computing power runs into the hundreds of billions of dollars a year, and the revenue needed to justify that spending is still arriving. Today’s prices assume much of this goes right. 

Calling AI a Bubble May Be Premature

Unlike the internet companies of the late 1990s, today’s largest technology firms are highly profitable. They are funding this buildout largely from operating cash flow, though increasingly supplemented by debt. 

Both Of These Things Can Be True at Once

A technology can be genuinely transformative, and the price paid for it can still be too high. Those are separate questions. 

What This Means for Investors

From an investor’s perspective, two implications are worth highlighting:

1. Make sure you know what you own. An investment in a broad U.S. index fund today has a much larger position in a handful of technology companies than it did 10 years ago. That isn’t necessarily a problem, as it reflects the collective wisdom of how all market participants have decided to allocate capital, but it is a different exposure now. 
2. If AI delivers everything its advocates promise, a diversified portfolio will participate in that outcome, owning the eventual winners without having to identify them in advance. Diversifying across company size, across value and growth, and outside the United States is not a bet against artificial intelligence. It is an acknowledgment that no one yet knows which companies will capture the value. 

The honest answer to “Is AI a bubble?” is that we will find out. The better question is whether your portfolio is built to accomplish your goals either way. If you have questions about how AI may impact your portfolio, please don’t hesitate to reach out to your advisor. 

Squire Investment Management Company, LLC (“Squire”) is an investment adviser registered with the United States Securities & Exchange Commission. Registration as an investment adviser does not indicate any level of skill or training. This document was created for informational purposes only and serves as general market commentary; it does not constitute investment advice, nor is it intended as an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors. All data or other information referenced herein is from sources believed to be reliable; however, Squire cannot guarantee the accuracy of information obtained from third parties. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.