Winners win more than losers lose. Artificial intelligence: too much expenditure, too little benefit?

Chart of the week

The chart is a few years old, but still very impressive. It shows the phases of rising markets (bull markets, green) and the phases of falling markets (bear markets, green) from 1956 to 2018.
Why this is important
As is easy to see, the phases of rising markets (green) dominate the phases of falling markets (red) by far.

We are often asked by clients why we remain 80-90% invested even though we currently consider the markets to be overvalued. The chart above shows the reason. It is better to risk the red phases than to get out too early in the green phases.
Conclusion: In the long term, it pays to be invested. You should not completely change your investment policy in phases of falling markets.
In phases of negative markets, we try to reduce the risk somewhat by holding more cash, but in the medium and long term we want to remain invested.

Artificial intelligence: too much expenditure, too little benefit?
This was the title of a study published by Goldman Sachs a few days ago. Goldman Sachs is one of the most renowned investment banks in the USA. Its excellent relationships with the American government are also well known. Almost every American government has one or two ministers who once worked at Goldman Sachs.

So far, the majority of studies on the topic of artificial intelligence have been positive. If such a renowned bank now comes up with a rather negative report, this could be a sign of an imminent trend reversal.
The core message of the study is that a lot of money is being invested in artificial intelligence applications, but that the companies using artificial intelligence applications are unable to increase their earnings accordingly.
So ChatGPT is on everyone's lips and many have already learned to appreciate it. Microsoft, which has integrated ChatGPT into its Copilot tool, writes: “A new age of AI begins”. Unfortunately, Microsoft Copilot receives largely negative user ratings. Here is an example of one of them: “Copilot in its current state is not even a nice gimmick, but unfortunately still almost unusable and not worth the money.”

But let's not be misunderstood. Artificial intelligence will change all our lives and society too. Just not yet. At the moment, expectations of companies that want to make a profit with the technology and the reality are still far apart.

Garner is a highly respected company that recognizes future trends and advises companies on them. The chart shows that many applications of artificial intelligence are still at an early stage of development, where expectations are usually overestimated. It is generally advisable not to invest in a trend until the fourth stage of the trend (slope of enlightenment). In other words, when the initial disillusionment has been dealt with.
What we are currently seeing are all tools that fall into the Generative AI category. This is the first stage of AI development. ChatGPT, for example, is a good chatbot that uses optimized models to provide better answers than previous search engines, but this still has nothing to do with “intelligence”. The result is achieved through clever training and great computing power. Computing power that comes at a price:

The data centers used for search queries and artificial intelligence applications such as ChatGPT require more power than countries such as Italy, Taiwan or Australia. A question entered into ChatGPT requires up to 25 times more energy than a standard Google query.

The chart shows an estimate by Goldman Sachs. By 2030, the use of artificial intelligence will increase the demand for energy in Europe by over 40%. This is not in line with the current goals of reducing energy demand and becoming CO2-neutral by 2030 or 2040.

The chart shows the valuation of shares with the theme of artificial intelligence (black line, basket of AI shares compiled by Goldman Sachs) and the S&P 500 (yellow line). The price/earnings ratio is used as the valuation benchmark. The valuation of artificial intelligence stocks is massively higher than that of the other stocks in the S&P 500 benchmark index. As the Goldman Sachs study suggests, this valuation is not justified.

An imminent correction in these stocks would therefore come as no surprise.