Investors were left reeling last week as they grappled with the disruption artificial intelligence could wreak on industries around the world, and further questions are likely to arise this week. But Deutsche Bank said in a note to clients this morning that this liquidation should be expected as it is a recalibration of expectations that may have been overly optimistic.
Software stocks in particular have suffered amid growing concerns that large language models could replace current service offerings. Companies in the legal, IT, consulting and logistics industries have also been affected. JPMorgan wrote last week that some $2 trillion had been wiped out of software market value alone, a reality two weeks ago Deutsche Bank’s Jim Reid dismissed as purely academic.
Reed has been speculating on whether a 13-digit sell-off would happen for some time, telling clients: “For months, my stated view has been that no one really knows who the long-term winners and losers of this extraordinary technology will be. Yet, as recently as October, the market was implicitly pricing in a world in which nearly every tech company would be a winner.
“We’ve seen a more realistic divergence in the tech sector in recent weeks, but this repricing is now rippleling through the broader economy at an alarming rate.”
Reid isn’t the only one who suspects investors may have been painting the entire stock market (and, indeed, the broader economy) in the same optimistic light. Some speculators make broad arguments that the efficiencies provided by AI will spell victory for the vast majority of companies, while others believe that while AI is not in a bubble, some of the over-optimism may burst.
JPMorgan CEO Jamie Dimon explained at the meeting: wealth Last year’s most influential women’s summit: “You should be using it” (speak to any business listening). But he added that back in 1996, “the Internet was real” and “you could think of the whole thing as a bubble.” He then broke down the real differences he saw — artificial intelligence on the one hand, and generative AI on the other. That’s an important distinction, Dimon said, adding that “certain assets are very expensive and in some form of bubble territory.”
In fact, Jeremy Siegel, professor emeritus of finance at the Wharton School of the University of Pennsylvania, believes this shift shows that investors are “asking the right questions.” A week ago, Siegel, a senior economist, wrote in WisdomTree: “When companies talk about $200 billion in capital expenditures, the market should take a closer look at payback periods, competitive dynamics, and whether a durable moat can be built in an environment of rapid technological advancement. This tension explains why leadership will continue to rotate even if the secular story remains unchanged.”
Still, Reed said the market may be overzealous in repricing, arguing that disruption to “old economy” sectors seems overdone: “The real challenge is that even by the end of the year, we still don’t have enough evidence to confidently identify structural winners and losers. That leaves plenty of room for investors’ imaginations, whether optimistic or pessimistic, to be optimistic or pessimistic. So such large sentiment swings will continue to be the norm today.”
