AI Hype: Between Euphoria and Bubble – Jerome Powell Warns of Risks

The current enthusiasm for artificial intelligence is often compared to the dotcom bubble of the 1990s. Some investors believe that Federal Reserve Chairman Jerome Powell highlighted this comparison, consciously or unconsciously, on Tuesday. Powell stated in a discussion in Rhode Island that stock prices are currently relatively highly valued. However, he emphasized that there is currently no increased risk to financial stability. These statements strike a chord with some market observers. Specifically, in technology heavyweights like Microsoft, Apple, or Nvidia, parallels are seen to the dotcom era, when speculation drove up prices. Ed Yardeni of Yardeni Research draws parallels to previous Fed devaluations. In the financial world, concerns are growing that the nearly four-year-long AI rally could grow into a bubble. Such bubbles have led to economic crises in the past, including the recessions of 2001 and 2008. Yardeni reminds that financial crises are often unexpected "Black Swan" events fueled by irrational euphoria. The term "irrational exuberance," first used by Alan Greenspan in 1996, describes a point at which assets rise uncontrollably, followed by sudden declines. While many investors are worried about today's valuations of tech stocks, some industry experts point out that the valuations have not reached the extreme levels of the late 1990s. According to Christopher Gannatti of WisdomTree, the current price-earnings ratio shows that it has not reached the dotcom highs. Furthermore, there are structural reasons why tech stocks are valued higher today. Growing revenue bases and proven business models, supported by the use of AI which increases efficiency and expands profit margins, could play a role. Analyses by Morgan Stanley suggest that the use of AI could generate an annual economic benefit of up to 920 billion dollars.