Are global indices collapsing or correcting?

When several indices took a dive last week, doomsayers no doubt assumed it was the call of a crash and started shorting the market. They probably did well in the first few days, but when the rather suspicious resistance to the downward trajectory kicked in on 5 August, those sell orders turned into risky burdens.

Now we are seeing a slightly bullish range of stability forming for all the major indices, but will it last? Can we expect a rally recovery, or is a crash inevitable? Let’s dig a little deeper.

Signs that precede crashes

In 2000, there were signs, big, bright, loud signs that the tech sector had grown beyond its foundations and a correction was due… a big correction. The dot-com hype was in full swing and tech companies were throwing money around like there was no tomorrow… ironically true for those unlucky few who didn’t survive the bursting of the bubble.

Many internet companies had extremely high valuations despite having little or no profits. These valuations were based on future growth projections rather than actual performance. Sound familiar? There was a surge in initial public offerings (IPOs) of internet companies. Many of these companies had no viable business models, focused solely on gaining market share.

Many dot-com companies operated on business models that were not sustainable in the long term. They often relied on heavy spending to attract users without a clear path to profitability. The market became quickly saturated and when the hype lost momentum, reality took a bite and the internet bubble burst.

For the last two years, we’ve watched billions fall into AI development. And what’s new? The level of bias and blunders is staggering and seems to get worse with each new release. This means, for now, the practical applications available to AI are extremely limited. Nobody is going to trust AI to diagnose patients or even teach toddlers. For now, the technology is just too unpredictable.

And so, we are seeing dozens of small and huge tech companies spending billions on AI only to realize the practical uses are worthless. It’s hard to ignore the parallels with the internet revolution now surfacing, and where this might be heading isn’t looking comforting.

AI’s ROI fiction

Looking back, there was significant speculation in the stock market, with investors pouring money into Internet stocks without fully understanding the businesses or their potential for profitability. And we are seeing it again.

Microsoft is reportedly in talks to invest an additional $10 billion in OpenAI. But now Microsoft looks like the mark at a poker table. Billions of dollars invested, little AI sales to show for it, and shelling out $13 billion for what Apple could secure for free just 18 months later. Microsoft could be a warning to the broader AI space as experts increasingly warn of a widening gap between what companies are spending on AI and what they're getting back from it.

Generative AI promised to change our lives—better productivity, medical breakthroughs, environmental solutions, and personalized learning. Instead, we got deep fakes, disinformation, mistakes, spam, and plagiarism.

Even Goldman Sachs, the once ambassador to all things AI, is now saying that the amount of capital investment in this sector, which is billions of dollars now, is too high and the returns are too low.

Big tech firms like Microsoft, Alphabet, and Meta have thrown mountains of cash to build out the infrastructure to stay ahead of the AI game—things like high-end computer chips, GPU data centers, and power supply.

• In the latest quarter, Microsoft's capital expenditures, or capex, surged 79% to a record $14 billion and said it'll continue to grow. 
• Google's shot up 91% to $12 billion. 
• Meta's came in at $7 billion and expects the spending to swell to up to $40 billion. 
• Amazon reported $14 billion in capex for Q1, and CFO Brian Olsavsky told analysts he expects that to be the low quarter of the year. Its cloud unit just bought a nuclear-powered data center in Pennsylvania for $650 million.
• Barclays simply says the math doesn't add up. Wall Street expects $60 billion of incremental capex spent, with just $20 billion—one-third of that—to show for it in extra cloud revenue. 

According to experts, the problem here is that the spending is far outpacing the revenues that these companies can actually expect to see because of AI. The amount of capital investment in this sector is so large that it's almost unimaginable that we're going to get a rate of return on it over the next few years. 

“AI bulls seem to just trust that use cases will proliferate as the technology evolves. But 18 months after introducing generative AI to the world, not one truly transformative, let alone cost-effective, application has been found,” said Jim Covello of Goldman Sachs.

Sequoia, the venture capital firm that made early bets on Apple, YouTube, and Instagram, asks: outside of ChatGPT, how many AI products are consumers really using today?

An MIT professor says the promises of a huge productivity boost are way overblown. Those estimates are quite exaggerated because if you look at what the current models can do, the most reasonable thing to expect is that within the next 10 years, they're going to do a little bit more of the same.

AI may increase productivity by just 5% and GDP growth by less than 1% in the next decade. 

Sequoia has also crunched some numbers, seeing "a big gap between the revenue expectations implied by the AI infrastructure build-out and actual revenue growth in the AI ecosystem—a gap that is now $600 billion wide.

Conclusion

So, AI looks overbought and overpriced, and since AI is the major volume generator for many indices, the narrative has some logic, but when we dig deeper, the concept doesn’t hold up. Why did indices in Australia, the UK, the US, Germany, and Japan, all take a dive on 1 August and begin a rebound exactly on 5 August? Every index dropped on the same day and pulled back four days later. Does that sound like an AI tech stock correction?

For sure, it feels like something big is coming. We all feel it. Whether you are planning to short a crash, or wait for rock bottom and jump on indices for a long-term rise, Exness has got your back. The mobile trading app will keep you up to date so you can react fast to market news, and with reliable execution and rapid withdrawals, you’ll have real-time access to the world of finance.