James Ferguson, a founding partner of the UK-based macroeconomic research firm MacroStrategy Partnership, cautions that the current AI craze among investors might be inflating a market bubble similar to the dot-com era. Speaking on Bloomberg’s Merryn Talks Money podcast, Ferguson drew parallels between today’s AI fervour and the excessive tech hype that preceded the dot-com crash, emphasizing that such bubbles often end poorly.

Key Concerns:

  1. AI’s Unproven Utility: Ferguson argued that the hallucination problem, where AI models generate false information, could limit the technology’s practical applications. He expressed scepticism about AI’s reliability, stating, “If AI cannot be trusted, then AI is effectively, in my mind, useless.”
  2. Energy Consumption: AI’s high energy demands could hinder its cost-effectiveness. An Amsterdam School of Business and Economics study indicated that AI applications could consume as much power as the Netherlands by 2027. Ferguson noted that running these chips is also expensive beyond the cost of Nvidia’s high-priced chips.
  3. Overvaluation of AI Stocks: Ferguson highlighted that Nvidia, currently trading at nearly 40 times its sales, might not justify its valuation if it fails to maintain its growth trajectory. Comparing Nvidia to dot-com era hardware giants like Cisco and Intel, which have disappointed investors over time, he questioned the long-term value of AI stocks.

Investor Caution:

Ferguson warned that investors drawn into the AI hype might face significant risks like those experienced during the dot-com bubble. He pointed out that excessive enthusiasm has led to concentrated market returns in tech stocks based on optimistic growth estimates.

Despite acknowledging that predicting the end of a bubble is challenging, Ferguson advised investors to seek value elsewhere. He recommended looking at U.S. small-cap stocks, which are currently undervalued and may benefit from potential interest rate cuts. These stocks, he suggested, offer growth in a “good old fashioned, steady way,” unlike the speculative surge seen in AI-linked stocks.

While the AI bubble could lead to widespread pain for investors if it bursts, Ferguson remains optimistic about finding value in overlooked sectors. He emphasized the importance of cautious investing, especially in the face of inflated AI stock valuations.