The foolish AI stock freak-out

Financial market sentiment is overwhelmingly negative at present. The semiconductor sector just experienced its worst drawdown since the Great Recession, and the neocloud stocks, which just a few months ago were on everyone’s buy lists, have imploded on fears of an artificial intelligence bubble.That’s just the start. Both Anthropic and OpenAI — with their warnings that AI could become an existential threat to humanity —have provided the far-left’s anti-growth movement with new talking points. To top it off, there is the drumbeat that investment in the AI revolution will stop dead because the companies investing trillions of dollars in AI will never earn sufficient economic returns to justify their investments.But the skeptics are missing some profoundly important points. First, demand for computing power continues to grow at phenomenal rates. Second, based on the order books of ASML, TSMC, as well as many AI semiconductor companies, including Nvidia and Micron, there is visibility for revenues and profits into the next decade. Third, the economy is in good shape with GDP growth of around 3%-plus. Fourth, worries about a prolonged, aggressive rate tightening cycle are misplaced. With hourly wage inflation running at 3%, a wage-price spiral cannot occur. Fifth, earnings growth for the next several quarters should continue to be phenomenal, well above historical averages of high single-digit growth. In fact, earnings growth for the current quarter could be as high as 30%. Finally, among almost all nonpartisan economists, there is a strong consensus that the AI revolution will significantly increase long-run productivity growth for the United States.Let’s break down the reasons to be optimistic about U.S. equities.First, there is no valuation bubble. Goldman Sachs just reported that the S&P 500’s price-to-earnings ratio has declined from 23 a year ago to 19 times expected earnings. Stocks are now trading at their 10-year average. Equities have become reasonably priced because profits have grown faster than share prices. This is persuasive evidence that the AI investment boom rests on strong foundations and is generating the profits necessary for continued strong investment and growth.The AI-related revenue numbers from America’s hyperscalers should put to rest talk about a bubble. Google’s cloud platform is growing at rates in excess of 60% as customers embrace its Gemini ecosystem. Its contracted future revenue backlog has expanded dramatically, reflecting substantial enterprise multiyear commitments.Microsoft reported 43% growth in Azure revenue in its June quarter. Its Microsoft 365 Copilot service exceeded 30 million paid seats. These are customers paying for computing capacity and software, providing evidence that demand extends beyond speculative enthusiasm. And the global leader in cloud computing, Amazon, with a 30% share of the global market, is experiencing its fastest growth, 37%, in several years. Massive multibillion-dollar commitments from major AI labs and enterprises have driven its backlog to historic highs.The AI opportunity reaches beyond selling access to AI chatbots. AI can help businesses write software, process documents, serve customers, and analyze information. The investment case is straightforward: With AI, companies produce more with the same resources.META HIT WITH $25 BILLION PENALTY OVER CAMBRIDGE ANALYTICA DATA PRIVACY VIOLATIONSEven modest improvements across the $30 trillion U.S. economy create substantial productivity growth. The resulting gains support higher wages, stronger profits, and lower prices.To drive home the point that the AI investment boom is not a bubble, just look at the numbers SpaceX reported on Tuesday. Revenue growth for AI related operations, up 195% on a quarter on quarter basis. The growth is being driven by its AI computing leasing business and the adoption of Grok, SpaceX’s AI ecosystem, by businesses across the world.The writer owns shares in Google, Micron, Nvidia, and SpaceX.James Rogan is a former U.S. diplomat who later worked in law and finance for over 30 years. He writes a subscription-based daily note on markets, economics, politics, and social issues. His email is [email protected].