Judging by the state of the financial markets, the prospects for the world economy have never been better.
it is not easy to reconcile this statement with a June 2024 IPSOS survey suggesting that more than 60% of people interviewed worldwide believe that their country is in a bad economic situation, with inflation seen as the public enemy number one.
Thus, one feels compelled to ask an odd question: What do the financial markets know in their infinite wisdom that individual investors do not?
Every day, pundits agonize over the impact of generative artificial intelligence (‘AI’) on equities. The consensus seems to be that gAI, and, by extension, the stock market, are experiencing a bubble.
The challenge is that none of the AI benefits are currently quantifiable, which makes them prone to misexpectations powered by fantasies. Gartner, a research and consulting firm, is there to remind us that new technologies are subject to a ‘hype cycle’ composed of five stages:
(1) Innovation;
(2) Inflated expectations (overshooting);
(3) Trough of disillusionment (undershooting);
(4) Slope of enlightenment (solid recovery); and
(5) Plateau of productivity (maturing growth).
An analysis recently published in the Financial Times discussed what would happen to the broad market if the presumed AI bubble burst. It concluded that the S&P 500 rally of the last few months would ‘end badly’ because it has been exclusively driven by AI and AI-related stocks. Since everyone else in the broad index has underperformed since March, there would be no support for equities.
There is a more positive side to the analysis. If there has indeed been a decoupling of AI vs. non-AI stocks, an AI downcycle would be contained. And if AI stocks’ performance proved sustainable, non-AI stocks would need to catch up since, ultimately, AI should benefit them: there is no AI world without a non-AI world transitioning to an AI world.
Whatever its shape, the AI cycle will affect market sentiment and indices for years to come. It will add to the ESG sentiment cycle (anticipated here in early 2020) while the macroeconomic cycle remains in self-searching mode.
Cycles of all types create investment (incl. M&A) opportunities. They only require that investors project themselves into stage 4 of the Gartner Hype Cycle and see the ‘slope of enlightenment.’
The summer months offer the opportunity to maintain and recharge what German speakers brilliantly call ‘Gestaltungsdrang’, literally the urge to shape, create, or craft.
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