The sentiment among the global elite meeting in Davos, Switzerland, is often considered a reliable indicator for investors, but a contrarian approach is essential. Buying when the elite are pessimistic and selling when they’re optimistic has historically been a successful strategy. The recent focus on artificial intelligence (AI) at Davos raises questions about whether the excitement around AI is overdone. While AI-related stocks experienced significant gains following the launch of ChatGPT, the surge may have already been priced in. Assessing both the reality of AI advancements and current market expectations is crucial.
Nicolai Tangen, head of Norway’s sovereign-wealth fund, acknowledges the real progress in AI but has reduced exposure to big tech stocks, including Microsoft. Despite the hype in Davos, companies are genuinely excited about the potential productivity gains from AI. BlackRock’s COO, Robert Goldstein, sees large language models, like ChatGPT, providing a quick return on investment, emphasizing tangible benefits in 2024.
The skepticism about AI’s potential is countered by expectations of improved productivity, with AI acting as a “co-pilot” to enhance human tasks. However, there is a distinction between behind-the-scenes uses and consumer-facing applications, which may take longer to materialize. While AI experimentation is widespread, its impact may be felt sooner in business services than in consumer-oriented applications.
The stock-market excitement around AI service providers, such as Microsoft and hardware providers like Nvidia, reflects the growing interest. However, the initial indiscriminate buying of AI-related stocks has given way to more selective investments. While Nvidia’s earnings continue to soar, smaller AI companies have seen significant declines. This shift suggests a less frothy market, potentially providing opportunities for investors.
Despite the minibubble in the first half of the year, current valuations are not extreme, though expectations remain high. Nvidia and Microsoft are still viewed positively, but investors need to exercise caution. Betting on AI in general may lack diversification due to the limited number of listed AI stocks. While AI’s potential is significant, uncertainties and challenges persist. Contrarians should be wary of the “Davos Consensus,” while others may hope for AI to boost productivity and contribute to economic expansion.