JPMorgan: AI still has a lot of room for significant growth, and a technology stock bubble is unlikely to occur in the short term

According to the Zhitong Finance and Economics APP, Jingshun Fund stated in a recent article that the market has been stirred up by the world's largest AI chip manufacturer, leading to doubts about whether the investment frenzy in artificial intelligence has come to an end. With several recent reports highlighting the limitations and shortcomings of this technology, skepticism about the economic benefits brought by the AI revolution is growing. On the contrary, expectations for AI have peaked, although there is still no concrete evidence that this technology can improve productivity. More importantly, investors may be entering a period of shattered illusions, but once macroeconomic benefits begin to emerge, this doubt will dissipate.

Artificial Intelligence (AI) - An Investment Theme with Significant Growth Potential

From a market perspective, the initial pullback may be a "healthy breather" after the recent investment frenzy. Overall, it is not believed that AI will become another tech bubble in the market.

Analysis shows that the AI investment theme has years of sustainability and still has significant growth potential, although the upward trajectory of AI-related stocks may be somewhat volatile.

Indeed, speculation on new technologies is more likely to be questioned due to its bubble-like characteristics, similar to the late 1990s internet bubble.

Although the AI bubble may burst one day, it will not happen in the short term. The current AI bubble still has plenty of room to expand.

Currently, the valuations of AI-related stocks in the United States remain high but reasonable, and they may further rise. Market optimism about AI is likely to resurface and further drive the US stock market higher next year.

An Industrial Revolution Led by Digitization, Big Data, and Artificial Intelligence

Overall, AI technology will significantly enhance total factor productivity in almost all economies globally, although the progress and impact may vary from country to country.

It is even believed that the world is undergoing another industrial revolution led by digitization, big data, automation, and artificial intelligence.

Of course, there may be a lag between technological development and its impact on overall productivity, as the benefits of these technologies take time to penetrate the economy.

In addition, countries' infrastructure (including regulations and legal frameworks) must be adjusted to fully unleash the potential of each new technology.

Looking back, during the late 1980s and 1990s ICT revolution, core technologies took about 10 years to establish a presence in the market, and it was not until the mid-1990s that their impact became widespread.

In the mid-1990s, due to ICT driving productivity growth, the US economy grew at twice the rate of the 1980s. However, as shown in the figure below, the lag in technology adoption gradually shortened.

Figure: Lag in Technology Adoption (Years)

Source: Comin & Mestieri, 2018

Therefore, although it may take about 70 years for the steam engine to be widely adopted since its invention, history shows that the adoption speed of artificial intelligence will be faster.

There are already signs that artificial intelligence has begun to drive businesses to increase capital expenditure investments, and the market generally believes that artificial intelligence is expected to increase the annual GDP growth rate of the United States by 1.5 percentage points over the next decade by enhancing productivity.

Chart: Generative artificial intelligence is expected to boost productivity and promote GDP growth

Source: Macrobond, U.S. Bureau of Labor Statistics productivity database, and Invesco Global Market Strategy Department

The Impact of Artificial Intelligence on the Global Economy

The United States is undoubtedly still leading the world, while Europe may not necessarily continue the remarkable performance of the first two technological revolutions. Many emerging markets are actively embracing cutting-edge technologies.

Although the artificial intelligence investment frenzy is sweeping the globe, the impact of artificial intelligence on developed markets may be more pronounced than on emerging markets, especially in terms of the labor market.

This is because emerging markets have a younger population structure, more labor supply, lower capital intensity, less developed human capital, and economies mainly centered around manufacturing.

Some data can also prove this conclusion - the International Monetary Fund estimates that in developed economies, 60% of jobs may be affected by artificial intelligence, compared to 40% in emerging markets and 26% in low-income countries.

Chart: The risk of unemployment due to artificial intelligence in emerging and frontier markets is lower than in developed markets

Source: International Monetary Fund, International Labour Organization, as of January 16, 2024

Chart: The correlation between employment in the service sector and ICT in emerging markets is lower than in developed markets, but markets like India and Latin America are clear exceptions

Source: International Monetary Fund, International Labour Organization, as of January 16, 2024.

However, although the impact of artificial intelligence on emerging markets is relatively weak, the significance it brings may not be lower than that of developed markets.

Most of the human capital and R&D expenses related to artificial intelligence development are borne by developed market economies.

This means that emerging markets can use artificial intelligence as a leapfrog development tool, adopting the most advanced solutions while saving high technology development costs. Countries such as India, Israel, South Korea, and China have successively begun to adopt this strategy.

Timely adoption of artificial intelligence, coupled with limited job displacement risks, will enable emerging market economies to occupy a more favorable position in the global technology landscape and significantly change the existing investment prospects.

Nevertheless, the greatest opportunity to capture value lies with adopters of artificial intelligence. The artificial intelligence value chain is divided into three parts: supporting infrastructure, artificial intelligence architecture, and artificial intelligence adopters.

Supporting infrastructure represents specialized hardware and platforms, artificial intelligence architecture refers to tools and systems used for training and deployment, and artificial intelligence adopters represent enterprises and functional departments that primarily use integrated software applications of artificial intelligence.

Currently, the world may be in a stage between the first two components, and it is not yet clear how artificial intelligence will be widely adopted and how it will change the long-term economic landscape.

Investment Insights - Technology Sector

As mentioned earlier, we are at the beginning of the era of artificial intelligence, with the main drivers of this thematic market coming from supporting infrastructure and artificial intelligence architecture.

Therefore, semiconductor, semiconductor equipment, large-scale data centers, and data infrastructure stocks have recently seen an increase.

It is believed that these sectors will continue to be catalysts for the artificial intelligence market in developed and emerging market economies in the short term.

Although there is speculation in the market that with the surge of the largest U.S. tech stocks to record levels, there may be a potential tech stock bubble, it is unlikely to occur at least in the short term.

The technology sector in developed markets is quite hot, but not overheated, as the P/E ratio of the "Big Seven" is close to 40 times, only half of the "Four Horsemen" (Dell, Microsoft, Intel, Cisco) whose P/E ratio exceeded 80 times during the tech bubble heyday in the 2000s. The P/E ratio of the six largest companies by market capitalization once reached as high as 64 times.

Chart: A comparison of the P/E ratios of U.S. stocks in the past 12 months and during the tech bubble of the 2000s

Source: Bloomberg, as of July 4, 2024

Furthermore, strong profits from technology companies also provide support for the long-term bull market of artificial intelligenceThe market has recently experienced a healthy correction as investors reassess the long-term impact of innovative technologies, but this is not seen as a reason to abandon the artificial intelligence theme.

On the contrary, this should lay the foundation for more sustainable growth in the technology sector.

Given that relevant indicators show a positive trend in domestic demand for artificial intelligence infrastructure components in the United States and other developed markets, the focus remains on related sectors.

Investment Insights - Emerging Markets

In terms of emerging markets, the market environment in the second half of this year will be particularly favorable for stocks in Taiwan and South Korea. The weight of the technology sector in the indices of these two markets is quite high.

Although the valuation of artificial intelligence-related stocks in Taiwan is not cheap, profitability is gradually improving. We will continue to observe and look for buying opportunities when the market experiences a significant pullback.

Recently, there has been a clear divergence in the performance of the Taiwan and South Korea markets. As of now, the Taiwan Weighted Index has surged by 30%, while the Korea Composite Stock Price Index has underperformed.

Although both are leaders in global chip supply, South Korean semiconductor companies have not enjoyed the artificial intelligence premium that their Taiwanese counterparts have. This may present a good opportunity to buy South Korean technology stocks.

Investment Insights - Long-term Capital Flows and Risk Factors

Looking ahead, it is expected that funds will flow from equipment and infrastructure to the field of artificial intelligence integrated software applications.

Similar to the situation when 4G was introduced, it is believed that with the continued rapid application of artificial intelligence, a new era of the economy based on artificial intelligence core and application-based programs will emerge.

However, it is important to remember that any new technology comes with risks. Given the powerful capabilities of artificial intelligence tools, unprecedented cybersecurity incidents may soon arise.

Therefore, the prospects for cybersecurity and information technology consulting services are promising