Investors currently focused on artificial intelligence (AI) are being advised to approach the market with caution. Joe Brusuelas, chief economist at RSM, recently cautioned that current market conditions may be overheating, suggesting that a correction might be on the horizon.
As both the S&P 500 and Nasdaq reach new highs and investor enthusiasm for AI permeates the market, volatility remains below long-term averages. Brusuelas explained that while strong economic fundamentals, such as low unemployment at 4.3% and manageable inflation, have supported market growth, there are signs that this upswing may be at risk. The RSM composite equity index has moved substantially above its long-term trend, indicating potential overvaluation of equity markets, especially within the tech sector.
Brusuelas pointed out that past instances of similar one-standard-deviation moves have frequently preceded market corrections, although they tended to be short-lived. Such movements suggest that while the current market might not yet be categorized as a bubble, it is showing signs that could lead to a necessary “healthy correction” to flush out speculative investors.
This caution comes in the wake of significant investments from major tech firms. For instance, Nvidia announced a staggering $100 billion investment into OpenAI aimed at bolstering AI infrastructure. While such investments are fueling the current market rally, they also raise concerns about the sustainability of such aggressive spending, prompting Brusuelas to advise that hard questions should be asked regarding potential malinvestment.
Brusuelas invoked the lessons from the dot-com bubble of the late 1990s as a warning. During that era, vast sums were poured into internet infrastructure, much of which later proved superfluous. He noted, “We developed way too much bandwidth that we couldn’t use properly,” implying that while the internet eventually revolutionized the economy, it required a painful period of adjustment—a similar pattern might emerge with AI.
Highlighting the speculative nature of the current market, Brusuelas noted that a recent study from the MIT Media Lab suggested that as much as 95% of existing AI projects may not yield a measurable financial return. This statistic further emphasizes that not all AI ventures will be successful, and many previously celebrated AI companies have since disappeared.
Amidst this speculative frenzy, Brusuelas stressed the need for heightened risk management among investors. He cautioned that while timing market corrections is notoriously difficult, it is essential to remain vigilant, as markets can continue to rise even amidst precarious valuations.
In summary, while the allure of AI continues to draw significant investor interest, economic indicators and market behavior suggest that prudence is advisable in the face of potential market corrections.
