AI births entirely new risks
With stock markets recently retreating marginally from artificial intelligence (AI)-fuelled record highs, the question many thoughtful investors are asking is: Will the bull run resume, or is this the beginning of a broader correction?
Of course, we can’t be certain but what we can know is that as stock prices continue to soar, fears of an AI bubble will likewise increase.
Financial markets have performed spectacularly since late 2022, and equities have accelerated their gains this year just as structural stresses begin to appear and debates about sustainability begin to intensify.
While a few famed investors are openly bearish – think Michael Burry, Ray Dalio, perhaps Warren Buffett, even some noted bulls are arguing a healthy retreat might be afoot.
The underlying mechanics of this bull market are said to differ fundamentally from the speculative mania that closed the twentieth century. The proponents of “this time is different” note the late-1990s dot-com boom was a psychologically-fuelled panic amid a fear of missing out on the internet’s promises.
By contrast, they say today’s rally is fuelled by an acceleration in genuine corporate profits. Analysts now anticipate a 25 per cent jump for the current year (CitiGroup; US$350, Goldman Sachs: US$340, consensus US$331), up from $265 last year, followed by another jump to US$394.52 in 2027.
Many bulls are encouraged by the fact the rally in the broader indices have largely tracked earnings growth, meaning price-to-earnings (P/E) multiples have remained grounded. The tech and communications sectors are currently trading at a combined multiple of just over 23 times forward earnings – a far cry from the 40 times earnings that marked the peak of the 2000 tech bubble.
It seems investors have yet to apply any exuberance to P/Es, which tends to produce asset bubbles of the catastrophic kind. Furthermore, broader sentiment gauges remain conservative, suggesting ample room for financial expansion.
But it’s not all smooth sailing.
Fixed-income yields are rising and raw industrial metals like copper have touched records amid geopolitical friction that seems to be a more permanent fixture.
Meanwhile, the primary catalyst for the supposed economic windfall – the rapid integration of AI – presents systemic vulnerabilities that could abruptly alter the market’s trajectory.
The narrative around AI is subtly shifting. Here are three possible narrative shifts to monitor for increasing frequency and mainstream adoption:
AI creates supply chain fragility
The first is that the prevailing market consensus is AI is an ethereal, weightless oracle capable of perfecting logistical networks, streamlining manufacturing, and minimising resource waste. However, the corporate rush toward business and supply chain optimisation comes with a hidden cost: systemic fragility. The more optimised and ‘perfect’ the system under assumed ‘stable’ conditions, the more fragile it becomes to exogenous shocks.
By engineering supply networks to run at hyper-efficient, razor-thin tolerances under ideal circumstances, these algorithmic models inadvertently create systems that are highly susceptible to collapse when subjected to real-world crises, such as the current one.
Significant ecological degradation
The second narrative shift concerns the environment. As much as we’d love AI to be nothing more than a cloud-based abstraction, the computational infrastructure has already demanded an acceleration of physical resource extraction that’s historically unprecedented. The raw hunger for specialised hardware is driving intensive mining operations that inflict deep, irreversible scars. Meanwhile, and as we’ve explained previously, the data centres powering corporate profit margins are not mere servers; they represent an expanding web of resource-heavy manufacturing, heavy industrial cabling, and massive power generation facilities that challenge ecological stability.
The resources aren’t infinite, so their costs will rise, alongside the cost of the environmental consequences.
Past the point of no return
Finally and perhaps most disquieting: Long-term economic stability has been traded away through the quiet migration of systemic control. Humanity has crossed a threshold where critical, high-velocity decision-making – governing everything from national defence grids to municipal power distribution and financial liquidity – has been permanently outsourced to algorithmic architectures.
There’s a comforting notion that we can simply disconnect AI during a crisis. This is already a fabrication. According to many experts, AI’s integration into defence, power and finance systems means turning AI off would trigger immediate domestic and economic collapse.
Conclusion
Investors are quibbling about whether the market is correctly reflecting the valuations of AI related companies, but while they do so, an emerging group of investors are looking even further ahead. Administration of global AI infrastructure will consolidate into fewer human hands. And those hands will be directing increasingly autonomous algorithms.
The real risks shift from financial metrics to existential ones. If the very engine driving today’s historic corporate earnings creates an unstable complex system, a resource-depleted planet, and unmanageable global operating networks, the current market boom, and maybe even its crash, may merely be the prelude to an entirely new category of systemic risk.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
