Understanding Artificial Intelligence: Past, Present, and Future Market Trends

by Danielle Woods, J.D. Attorney at Law

Artificial intelligence (AI) has become a buzzword in today's tech-driven world. From tech giants like Microsoft and Amazon to emerging leaders like NVIDIA and Meta, AI is shaping industries and revolutionizing the way we live and work. In this blog post, we'll explore what AI is, its historical development, and the current market trends driving its growth. We'll also examine the emotional and financial responses to these trends and provide practical advice on how to navigate this rapidly evolving landscape.

What is AI Anyway?

Let's start with a definition. To do that, I turned to the four largest companies in the world’s AI economy.

Microsoft: Using math and logic, a computer system simulates the reasoning that humans use to learn from new information and make decisions. What is Artificial Intelligence? | Microsoft Azure

Amazon: Artificial intelligence (AI) is the field of computer science dedicated to solving cognitive problems commonly associated with human intelligence, such as learning, creation, and image recognition. The goal with AI is to create self-learning systems that derive meaning from data. What is Artificial Intelligence (AI)? - Artificial Intelligence Explained - AWS

Meta: Meta AI is an intelligent assistant capable of complex reasoning, following instructions, visualizing ideas, and solving nuanced problems. Meta AI

NVIDIA: In its most fundamental form, AI is the capability of a computer program or a machine to think, learn, and take actions without being explicitly encoded with commands. AI involves developing systems that can perform tasks autonomously, ingesting and analyzing enormous volumes of data, and recognizing patterns. Artificial Intelligence – What is it and Why Does it Matter?

The Evolution of AI: Past and Present

Artificial intelligence has been around for decades. Computing machines were first conceived and used in their most basic form during WWII by the brilliant mind of Alan Turing. Since then, more brilliant minds have pushed the boundaries of what is possible. Most of us have grown up during the computer age, and our kids are growing up during the internet and smartphone age. For a nice overview, take a look at The History of AI: A Timeline of Artificial Intelligence.

However, even the most current definition of AI has been in the works for quite some time. While there is no single reason why companies are suddenly taking off, we can safely point to an abundance of cash, a healthy economy, rising demand, and a lack of regulation. These factors have created a perfect storm resulting in the Fab Four. In just 18 months, the largest technology companies in the world have been narrowed down to four big names: Microsoft, Amazon, Meta, and NVIDIA. The chart below reflects the stock share value growth of these four companies, ranging from 87% to 785%.

*Prices are approximate from Google Finance as of 6/27/24 at 11:30 a.m. ET.

The Next Industrial Revolution or the Next Dot.com Bubble?

My teammates Amanda Vaught, JD, and Emily Agosto, CPA, touched on the emotional and financial responses to this kind of market growth in their most recent podcast, "Connecting the Dollars."

As Amanda Vaught states, "These numbers are insane. They don’t happen very often. They get people excited. They get people greedy."

When we respond emotionally to financial numbers, we are vulnerable to making mistakes. Emily Agosto reminds us “to be wary of the source of your information.” Money can be made by others from misinformation.

With NVIDIA up nearly 800%, Amanda likens investor behavior to a “frenzy.” While some investors become overconfident, others become nervous. You may read some articles or blog posts comparing this rise of NVIDIA to the Dot.com bubble of the late 1990s.

Amanda believes that comparing the current rise to the Dot.com bubble makes it feel more extreme and plays into feelings of fear. She encourages us to be dispassionate and look at some facts. She says, “Yes, this is a tech company on the rise with new technology. There are some parallels. We did see a huge increase in stock prices in the late 90s leading up to the bubble.” It seems unreal because their products are not tangible to the retail consumer. They aren’t sold in stores for purchase. But the software is sold to industrial and tech companies which sell the products that consumers purchase, such as software and apps.

She also points out some key differences. NVIDIA continues to have earnings reports that seem “incredible,” but the numbers are justified because other companies are spending. It’s not like GAMESTOP from 2020 or a Dot.com stock from the 90s. There were no earnings to support the rise in stock share prices as they were completely speculative.

How can we know? Amanda and Emily looked up NVIDIA’s Price/Earnings Ratio. This ratio is the price of the stock divided by the audited earnings of the company. The higher the number, the more expensive the company stock is versus its earnings. NVIDIA’s is 74, trailing (recent time period). The forward P/E ratio estimate is 53. By comparison, the S&P 500 (largest 500 companies in the United States) average typically runs from about 18-30, so NVIDIA is slightly elevated. Now compare it to the Dot.com bubble when P/Es were 150-200. That comparison really puts it into perspective.

What to Do About It?

Just as no one could have predicted the current tech stock price climbs, no one really knows how long they will last. We encourage you to stay on course and review your own needs and desires with your risk tolerance routinely. As Emily reminds us, “Maybe this isn’t the only thing that needs to be discussed about your portfolio.”

Amanda cautions investors against jumping on any bandwagon. She says, “When stocks go up a lot, it’s a good time to take a look and see if it makes sense to buy more of it… The more you have [of one company], the more risk you take.”

Stay Diversified

We know it’s boring advice, but it works: Stay diversified and keep an eye on your savings rate as well as your investment allocation. Last, but not least, stay active in your tax planning. There are ways of being efficient.

It is easy to feel like you’re missing out when a particular company is rising faster than others. Should you have some of it? The answer might be yes, but you probably already own it in your portfolio without realizing it.

Whenever you are feeling unsure or just want to educate yourself, reach out to your advisor.