This edition of Market Factors starts with the belief that AI will proceed like every other tech trend – finance bubble collapse, then dispersion. We say good-bye to an icon in the diversion section, and as always look to the important data releases for the coming week <\/p>\n
Open this photo in gallery:<\/a><\/p>\n nicoletaionescu\/iStockPhoto \/ Getty Images<\/p>\n Market bubblesAI and the same old boom\/bust story<\/p>\n Fears about an AI stock bubble have reached the general populace as evidenced by The Atlantic feature \u201cJust How Bad Would an AI Bubble Be?\u201d<\/a>. Surprisingly, equity markets are quiescent \u2013 the VIX (CBOE Volatility Index) is merely treading water around the 16 mark, a level low enough to signal either complete contentment or overconfidence. <\/p>\n The S&P 500 is extremely expensive relative to history on more or less every existing metric. But, among the leading AI stocks the trailing PE ratios are nothing like Cisco System Inc.\u2019s 177 times earnings or Nortel Network\u2019s 136 times profits in early March 2000. <\/p>\n Among the current tech leaders, Nvidia is getting up there at 51 times trailing earnings but Microsoft and Amazon.com are trading near 36 times earnings. Meta Platforms and Alphabet are cheaper at just under 30 times. The big-name stocks are expensive but not late-1990s-style ludicrous. <\/p>\n This is not to say there\u2019s nothing to worry about. The Atlantic column writer Rog\u00e9 Karma focused on coding \u2013 a task that was supposed to be completely automated by now \u2013 to show the flagging promise of AI. <\/p>\n A recently published study found that programmers worked 20 per cent slower when using AI tools, when expectations before the study pointed to 40 per cent faster. Few applications are better suited to AI than coding, so its failure here raises awkward questions as to its eventual utility in the wider economy. <\/p>\n Nvidia stock will be the proverbial canary for the AI investment theme. Any indications of slowing GPU demand growth (it is forecast at between 25 and 30 per cent annually in the next five years) will be treated harshly by the market. This includes any announcement from the major spenders suggesting anxieties about monetizing their mammoth AI-related capital expenditure.<\/p>\n There will be an implosion at some point, that\u2019s just the way these things go. A finance bubble builds, collapses, and then most of the useful applications are developed. Investors were pointing and laughing at Pets.com in 1999, and then all of them were buying iPhones in 2007. The vast majority of railway tracks were built in the immediate aftermath of the 1873 railway panic that bankrupted thousands of late 19th century wealthy Americans. <\/p>\n The technology changes but human psychology doesn\u2019t and the market patterns persist even if the timing varies. I expect the AI boom to proceed in the same time-honoured way. <\/p>\n AI spending might be already peaking<\/p>\n Morgan Stanley Wealth Management chief investment officer Lisa Shalett is concerned that the AI-related spending that\u2019s propping up the S&P 500 is set to roll over. This would have significant negative effects on an index dominated by the builders of AI-supportive data centers and the equipment makers like Nvidia selling them the means to do so. <\/p>\n Ms. Shalett notes that the major hyperscaler tech firms like Microsoft, Amazon.com, Alphabet and Meta Platforms have increased capital expenditure fourfold to US$400-billion annually. This is a much bigger finance boom than anything from the 1990s tech bubble. <\/p>\n Between 1996 and 2000 U.S. telecom capital expenditures rose from 0.1 per cent of U.S. GDP to 0.7 per cent. From 2021 to now, hyperscaler spending has climbed from 0.55 per cent of GDP to 1.30 per cent. <\/p>\n Ms. Shalett then adds, \u201cCensus Bureau survey data indicates that AI usage and adoption are plateauing across every enterprise size, having apparently peaked at around 14% of the largest companies in June before falling to about 11% in August.\u201d <\/p>\n Open this photo in gallery:<\/a><\/p>\n Robert Redford in The Natural<\/p>\n DiversionsRIP Roy Hobbs<\/p>\n Robert Redford certainly made an impact on my life as probably the biggest movie star during my childhood, not that I understood the social importance of The Candidate or All the President\u2019s Men at the time. <\/p>\n I was a huge fan of Butch Cassidy and the Sundance Kid, The Sting and even the \u201880s-style cheesiness of The Electric Horseman. \u201cSkin that one, pilgrim\u201d from Jeremiah Johnson was a quote heard repeatedly at my house. The slow clap salute was invented at the end of the Redford prison movie Brubaker as far as I know. <\/p>\n The Natural, with the seemingly 63-year-old Redford hitting bombs in major league baseball, stretched my gullibility too far, however. He had a good reason for only wanting to play good guys (Indecent Proposal aside, of course) \u2013 mostly the only jobs he could get early in his career were as Nazis on tv shows and he got tired of made-up villainy \u2013 but it left his career mostly bereft of edgy brilliance like Paul Newman\u2019s Hud, The Hustler and Cool Hand Luke. <\/p>\n Robert Redford was a big, big deal though, for philanthropy as well as his enviable filmography. He will be missed as one of the last, pre-internet megastars and his passing makes me feel old. <\/p>\n The essentials<\/p>\n Looking for our updates on market movers, analyst actions, stock technicals, insider trades and other daily, weekly and monthly insight? Click here<\/a> to visit our Inside the Market page.<\/p>\n Globe Investor highlights<\/p>\n David Berman takes a look<\/a> at why renewable energy stocks are performing so well, even under the Trump Administration<\/p>\n What the start of a Federal Reserve easing cycle has historically meant<\/a> for U.S. stocks<\/p>\n Jamie McGeever tells us about<\/a> a crowded trade of late: going long U.S. stocks, short the U.S. dollar<\/p>\n China\u2019s stock market, once called uninvestable, is luring foreigners again<\/a><\/p>\n