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AI advancement is teetering on the edge of its lending period

The AI expansion may be experiencing a decline, a puzzling development.

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2 min read
AI's moment of prosperity is precarious
AI's moment of prosperity is precarious

AI advancement is teetering on the edge of its lending period

In the current technological landscape, Artificial Intelligence (AI) is widely anticipated to revolutionise the world, as stated by The Economist. However, a growing 'backlash' to the AI boom is emerging, according to Neil Shearing of Capital Economics. This sentiment is shared by Daron Acemoglu of MIT, who argues that the AI buzz often obscures the reality of a quite limited technology.

The parallels between the AI boom and the 19th-century railway mania are striking. Just as investors poured approximately 7% of Britain's national income into rail projects, tech firms are spending $1 trillion on data centers that will soon become outdated. The boom in railway investment ended with a financial crisis in 1847, and there are concerns that the AI boom could follow a similar path.

Recent investment analysts' notes have highlighted the technology's shortcomings. For instance, AI machines can confidently make stuff up when they can't find a reliable answer, a problem known as 'hallucination'. If important use cases for AI don't start to become more apparent in the next 12-18 months, investors' enthusiasm may begin to fade.

Despite the hype, AI has had almost no discernible impact on business practices or productivity so far. Major technology companies like Microsoft, Amazon, Alphabet (Google's parent company), and Meta are investing heavily in AI development, with combined spending expected to exceed $344 billion in 2025. Numerous German companies are also rapidly adopting AI, with 36% currently using AI technologies and 29% planning to increase AI investments in 2025.

However, the boost to productivity from AI is expected to be substantial, but it could be a few years yet before that feeds through to corporate earnings and GDP. The period of disillusionment regarding AI was inevitable, as it often takes time for new technologies to have wider economic effects.

Jim Covello of Goldman Sachs suggests staying invested in the beneficiaries of the AI spending splurge, such as chip manufacturers and utilities. He believes that beneficial AI applications are expected to emerge within the next 12-18 months as companies increase AI deployment across customer contact, marketing, and other fields.

Despite the challenges, the AI boom is not the first Silicon Valley tech hype cycle; virtual reality, the metaverse, and blockchain also attracted huge investments with few real-world applications. The AI boom may yet prove to be a turning point in technological advancement, but a cautious and informed approach is advised.

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