Authored by GoldFix ZH Edit

In an EOY report entitled Flying Blind, BOA feels if AI turns out to be a bubble, correlations between the Mag 7 and broader market could return with a vengeance. If A.I sputters, then Mag 7 would also certainly fall. Finally, if Mag 7 falls under those circumstances, then all stocks fall.

Given how high dispersion is currently in the S&P, a cracking of the Mag 7 could drive stock correlations significantly higher resulting in fragility risks to the S&P.

Why?

BOA argues there would be no place to hide as those top seven tech stocks have *been* the safe-haven (Tech Gold) for stocks the better part of 2 years.This, in combination with observations of how corporate America is actually implementing AI leads us to believe this is an actual bubble. First the AI bull case. 

The Bull Case

The Magnificent Seven will be able to capitalize immediately on AI not just at the top line sales, but also at the bottom line by greatly reducing operating costs by firing people.

Here’s what GSTrader Tony P. said on that in May of 2023

The fever around AI has been very detectable in the past month. - there’s a lot of rough work being done on the perceived winners. - the market is showing its hand ... it believes the biggest beneficiaries are the names at the very top of S&P index who notably carry the most market cap ... think MSFT, GOOG, NVDA

He was right. Those stocks and other companies benefited more than most. But, did those companies reduce costs, or create innovative tools with AI? No, not yet. Hence it is a bubble. And *if* bad news comes before these firms actually innovate or terminate employees, it's going to pop.

Right now they are doing neither to justify the valuations given them on AI's behalf. To be fair why should they?
Even better, if Powell starts easing the Mag 7 can continue promising to both innovate and cut costs but wont have to any time soon as long as Powell is printing again.  But if Powell does not cut..... look out.

What Companies are Actually Doing With A.I. So Far

Companies are feverishly adopting A.I. into current products as an add-on. They’re using it like customer service like Clippy of Microsoft fame. This behavior is not new

DropBox A.I. Tools....

Another example: Microsoft is now putting A.I. assistants in their Edge PDF reader to summarize documents if you ask it

We Have A.I. Buy Our Stock!!!

 

The Dot Com Bubble Example

This combination of circumstances is very common in bubble behavior. One we are likely all old enough to have known is the DOTCOM bubble.

Simply put: the internet was the tool that promised increased productivity while reducing cost for companies. It delivered on this, but only *after* they figured out how to use it. The idea took years to be made real. And between the birth of the idea and figuring out how to actually apply it is where all bubbles grow.

The dotcom crash forced all the pie in the sky types throwing money at online sock puppets to puke.

The market got ahead of itself. Then real change happened via survivors like Amazon which eventually replaced companies like Borders books2.

 

Artificial Intelligence is a bubble.

We tentatively think this is the current path for the AI revolution and bet Hartnett is correct. Artificial intelligence is a bubble. It is a bubble born like all previous bubbles, from a desire to see the good well before companies have figured out a way to let new tech disrupt existing infrastructures and before new innovators have figured out a killer application. Meanwhile The Fed is doing what they always do, after popping the last bubble they start the new one.

That is why we think Hartnett is correct. Established companies are slowly adopting AI in rather simplistic fashion, just as they had done during the DOTCOM bubble while reaping the hype of it all. Meanwhile newer companies are promising the world and cannot deliver yet. Some of those will never deliver. Some like Amazon, will. But not without a busted bubble first.