HOLT: 'AI bubble'? What are the risks?

The widespread enthusiasm around Artificial Intelligence is fueling a wave of capital investment and research activity across the technology sector. This surge in capital expenditures is unmatched, with leading firms committing resources at a scale that rivals entire industries such as Energy and Utilities across the US and Europe.

In the race to lead AI innovation, major technology players have significantly increased their R&D budgets. The scale of these investments in 2024 alone surpasses the total R&D spend of all listed European companies, underscoring the strategic importance placed on AI development.

These firms appear well-positioned to support such spending, generating a substantial share of overall economic profit in the US. With this financial strength, it’s easy to assume that the technology sector will dominate the AI landscape and maintain its competitive edge.

Despite the optimism, many AI use cases are still speculative, with revenue potential largely projected into the future. Even prominent voices in the field have cautioned that the sector may be experiencing a bubble. Current valuations in the technology sector are approaching levels last seen during the dotcom era, leaving little margin for error should cash flows fall short of expectations.

Several uncertainties could affect medium-term returns and growth, including unclear returns on capital investments, energy supply constraints for data centers, and rising global competition, particularly from regions with rapidly increasing R&D activity.