Last summer, the market experienced a brief but sharp contraction in the valuations of major US tech corporations due to concerns over escalating artificial intelligence (AI) infrastructure costs. The investment in large language models (LLMs) has been on the rise, especially since the emergence of ChatGPT in late 2022. Despite the uncertainty of when the economic pay-off will materialize, industry leaders remain committed to expanding their capabilities in AI.

The latest AI Pulse survey conducted by EY revealed that 97% of senior business leaders are already seeing positive returns from their AI investments. This high level of optimism may be driven by a desire to justify capital allocations in AI, even though the specific commercial benefits may not always be clear. Businesses are rushing to incorporate AI into their operations, with hopes that it will enhance efficiency and bridge the skills gap between low- and high-skilled workers.

As the AI market continues to grow, there are concerns about whether the scale of investment will be justified by net earnings growth. Some investors worry about the volatile performance of companies like Nvidia, amid fears of increasing competition in the semiconductor industry. While comparisons to the dotcom bubble have been made, AI valuations are more aligned with earnings, and current market leaders are established and profitable.

The AI industry is still in its early stages, offering speculative opportunities for investors willing to take on additional risk. It may be beneficial to adopt a blended approach that combines stockpicking with passive AI funds to capitalize on the industry’s growth. The impact of AI on manufacturing processes is clearer than on service applications, with significant advancements in science-related AI applications in industries like MedTech and pharmaceuticals.

While AI technology has enabled private equity and hedge funds to maximize returns through advanced trading techniques, relying solely on large language models may lead to market beta rather than alpha returns. The limitations of current AI technology, as highlighted in the Artificial Intelligence Index Report by Stanford University, emphasize the importance of not blindly trusting information technology networks.

In conclusion, the AI industry presents both opportunities and challenges for investors. By taking a cautious and informed approach, investors can navigate the evolving landscape of AI technology and potentially benefit from its growth in the long term.