Goldman Sachs warns of increasing risk of AI bubble burst: Investing in NVIDIA is both dangerous and foolish at the moment

According to the Zhitong Finance and Economics APP, on Wednesday, the US stock market experienced a sharp decline, with the S&P 500 index falling by 1.38%, and the Nasdaq 100 index plummeting by 2.9%, marking the largest single-day drop since December 2022. In this downturn, all the "Big Seven" tech giants, as market heavyweights, saw declines. In particular, NVIDIA (NVDA.US) saw a drop of over 6.6%, leading the market, while Apple (AAPL.US) also fell by 2.5%. In just one day, the market capitalization of the "Big Seven" evaporated by approximately $580 billion (about RMB 4.21 trillion). However, as of the time of publication, tech stocks like NVIDIA showed a slight rebound in pre-market trading.

Jim Covello, who has been in Wall Street for thirty years, has a deep understanding of the risks of a tech stock bubble. He pointed out that although the market seems to continuously create wealth, not all technological breakthroughs can achieve the expected results. He recalled the Internet bubble at the end of the 1990s and the recent cryptocurrency craze, warning that the field of artificial intelligence may follow suit. Covello specifically mentioned that investing in companies like NVIDIA could be both dangerous and foolish at the moment.

As the head of stock research at Goldman Sachs, Covello firmly believes that market reckoning will come, although it may not be this year or next. He doubts that the massive funds invested in artificial intelligence will trigger the next economic revolution, or even compare to the impact of smartphones and the internet. Once this becomes apparent, stocks that have surged due to the prospects of artificial intelligence will also face declines.

He stated, "Most technological transformations in history, especially those with revolutionary significance, have replaced very expensive solutions with very cheap solutions." The opposite is true when high-cost technology replaces jobs.

Covello's views are gaining support from some market observers who are skeptical of the key factor driving the growth of the S&P 500 index since the end of 2022—the power of large language models. They question whether this model can truly usher in the next great stage of capitalism, whether it can truly enhance efficiency and accelerate growth through intelligent machines, thereby driving prosperity in corporate profits.

Nevertheless, there are still many supporters of artificial intelligence. Jamie Dimon, CEO of JPMorgan Chase, believes that the transformative potential of artificial intelligence is no less than that of the printing press, steam engine, and electricity. Michael Arone, Chief Investment Strategist at State Street, predicts that artificial intelligence will bring about a "lasting and unprecedented productivity miracle." Joseph Briggs, Senior Global Economist at Goldman Sachs, even estimates that artificial intelligence will ultimately automate a quarter of job tasks and accelerate economic growth.

This optimism is driving massive investments by tech companies, attempting to dominate the field of artificial intelligence. This is a huge boon for companies providing hardware needed for AI models, such as NVIDIA, Broadcom (AVGO.US), and Super Micro Computer (SMCI.US). However, skeptics warn that commercial expectations of this technology may be greatly exaggerated, and if tech giants reconsider their massive investments, it could trigger a market pullback David Bahnsen, founder and chief investment officer of Bahnsen Group, is one of them. He avoided NVIDIA and other large tech stocks because he foresaw a potential "disaster." He recalled, "The way we made money was when the last fool traded Cisco (CSCO.US) in March 2000, we didn't take the loss."

Despite occasional drops in tech stocks due to concerns, they still remain near historic highs. Since hitting bottom in October 2022, nearly half of the S&P 500 index's gains have been concentrated in six stocks: Apple, Microsoft, NVIDIA, Alphabet, Amazon, and Meta Platforms. NVIDIA's market value has increased by nearly $2 trillion this year, and despite a nearly 140% rise in stock price, analysts still recommend buying.

However, so far, the returns on all artificial intelligence investments have been relatively limited. Microsoft, Alphabet, Amazon, and Meta have collectively invested over $150 billion in capital expenditures over the past four quarters, mainly for computing power to train and run large language models. While Microsoft stated that its AI services contributed 7 percentage points to its cloud service sales growth, the specific amount was not disclosed. Amazon and Alphabet also indicated that AI's contribution to revenue is increasing, but the specific numbers remain vague.

For long investors, these numbers are not yet enough to prove their investment decisions. Adam Gold, chief investment officer of Katam Hill, believes that companies like Meta have already achieved sales growth by using AI to improve advertising targeting and engagement algorithms. He emphasized, "They are the smartest and best capital allocators in the world."

However, for some cloud computing giants, the actual benefits of AI in boosting sales are not yet clear. For example, Salesforce (CRM.US) suffered a sharp drop in its stock price in May as it was expected that its quarterly sales growth would hit a historical low, contrasting sharply with their long-standing optimistic expectations for AI. Additionally, according to a survey conducted by San Francisco-based Lucidworks, less than half of companies investing in AI report significant returns, further highlighting the challenges in the commercialization process of AI.

Therefore, doubts about the long-term prospects of AI still persist. It is expected that investments in AI infrastructure will reach around $1 trillion in the coming years, but for companies to obtain sufficient returns, they need to be able to use it to solve increasingly complex tasks. It is warned that if significant use cases do not emerge within the next year and a half, the stock market situation may reverse However, he currently believes that we have not reached that stage yet, and continued expansion is likely to continue to drive investors to buy stocks such as NVIDIA.

Covello summarized, "One of the most important lessons I have learned in the past 30 years is that bubbles may take a long time to burst." This reminds investors to remain cautious when faced with seemingly unlimited opportunities