AI Boom Or Bubble? Big Tech's $400-Billion Gamble Echoes Dot-Com Era Fears

Over the past year, the AI boom has reached a key inflection point, believe researchers at Renaissance Investments. Fueled by the promise of exponential "scaling laws", capital expenditures have skyrocketed, said a report by the firm. The largest US technology firms are on track to spend nearly $400 billion this year alone.

So far, investors have looked upon these capital investments favourably. The so-called Magnificent 7, who are driving much of the buildout, have continued to outperform. Oracle's stock surged 36% after announcing a deal to build OpenAI's data centers.

Yet, it remains far from clear whether these investments will ultimately deliver adequate financial returns, as per the report. Bain estimates that, to justify their cost, these data centers would need to generate $2 trillion in annual revenue by 2030.

Renaissance draws parallels to past technology buildouts. In the late 1990s, during the dawn of the internet, telecom companies such as Global Crossing and AT&T spent over $500 billion laying fiber-optic cable in anticipation of rapid Internet adoption. Their projections proved overoptimistic, leaving the industry to suffer for years amid a glut of capacity and collapsing prices.

Still, investment in productive assets allows households and corporations to benefit from cheaper access to technology even after any potential bust, supporting productivity much as the computer hardware surge of the late 1990s did.

Whenever new foundational technologies are introduced, they demand massive upfront investment in hardware and infrastructure for both implementation and future adoption,. Yet, the report added that it is common for companies in the ecosystem to become overly optimistic and overinvest, fearing they might otherwise "miss the bus."

The US stock market is increasingly driven by a single theme, believes the brokerage, pointing to artificial intelligence. According to JPMorgan, AI-related stocks have accounted for 75% of S&P 500 returns, 80% of earnings growth, and 90% of capital spending growth since ChatGPT's release in late 2022.

However, the report states that this does not necessarily mean the S&P 500's forward earnings growth is unsustainable, so long as AI demand continues to expand, said the report.

Historically, Renaissance states, each new general-purpose technology — from railroads to the internet — has coincided with some form of financial market bubble, as investors rush to capitalise on uncertain but potentially immense future gains. This cycle, the report suggests, is "unlikely to be different," though the market remains in the inflationary stage of the current bubble.