Course Correction Ahead: Rob Arnott Skeptical of AI Investments

Rob Arnott, founder of Research Affiliates, is impressed by the capabilities of modern AI solutions, especially after ChatGPT provided a concise summary of one of his scientific papers. Despite this enthusiasm, Arnott does not share the optimism of many investors banking on a rosy future for AI stocks. In his opinion, much of the potential value increase is already factored into stock prices, tempering his expectations regarding future returns. Two factors, in particular, make Arnott doubt the sustainability of the AI hype: first, the growing competition in chip manufacturing. While Nvidia is currently considered the market leader, he does not see other manufacturers idly watching Nvidia maintain its high profit margins. Additionally, there is unclear profitability for AI users, who have yet to find a clear path to monetizing the technology, despite already having invested enormous sums. Looking at the overpriced AI stocks and the overall market, Arnott speculates that both the market capitalization-to-GDP ratio of the US and the Shiller P/E ratio are at worrying highs. Given these circumstances, Arnott would be cautious about investing in the S&P 500 and instead considers cheaper alternatives. Arnott emphasizes his preference for small-cap value stocks and stocks from emerging markets as worthwhile investment opportunities outside the overvalued AI sector. With a smile, he dismisses accusations of being a "perma-bear" and justifies his confidence with the relative valuation of these stock segments, which investors can access through ETFs like the Vanguard Small-Cap Value ETF (VBR) or the iShares MSCI Emerging Markets Value Factor ETF (EVLU).