In December 2024, Vanguard – the second biggest global asset manager – released a statement from their Global Chief Economist, Joe Davis. The statement argued that investors and market participants have overvalued AI as ‘we are not yet in the AI boom’.
Despite asserting that, ‘We see roughly 6 to 65 per cent odds that AI is more impactful than the personal computer,’ Davis qualified his statement, ‘The US stock market today is pricing roughly a 90 per cent probability.’
The Financial Times elaborated on Vanguard’s suggestion, pointing towards the dotcom bubble and OpenAI’s stupendous $157 billion valuation.
We might describe the overvaluation of AI as optimistic.
AI optimism isn’t a particularly well-defined concept. Some sources suggest that the optimistic approach references how AI can improve the quality of life globally (e.g. by democratising access to education, medical advice, etc.).
Other sources push ‘AI optimism’ as a more potential-centric concept, focusing on how AI’s present and future benefits come to fruition. In other words, can AI keep up with the hype it has accrued since ChatGPT’s release in 2022? Or are reports of AI’s ability to boost worker productivity and make AI companies (and investors) rich greatly exaggerated?
In the context of Vanguard, AI optimism veers more towards the latter. However, Vanguard’s report doesn’t mention how overvaluing AI might potentially be detrimental to AI companies.
From the AI industry’s perspective, being overvalued could (actually) stymie growth for many reasons. Let’s explore three of them.
As Joe Davis suggests, overvaluation raises expectations of AI’s capabilities when it hasn’t even reached its peak of productivity. Businesses might fear losing investor confidence, thus maintaining shortcuts and appearances rather than genuine, long-term innovation.
AI washing occurs when firms falsely claim that their technologies are AI-based. Firms wanting a piece of the investment action might choose to cash in on the keyword buzz, breeding public distrust in the industry.
Generative AI’s status as the favourite child (or at least the flashiest subsector of AI) might lead to excessive hype and saturation. However, analytical AI deserves better.
Is the solution to advocate for lower stock prices, then? A market correction might help stabilise prices and prevent AI startups from raising funds while potentially reducing capital flow into the sector. Maybe, for the AI industry as a whole, there’s just no winning.
Vanguard’s suggestion that AI is not at the peak of its potential for economic growth seems reasonable. Yet, it stems from the investor perspective, meaning it fails to balance the need for suitable AI investment with the threat of overvaluation.
Yet, the point remains that AI’s beneficiaries don’t exclusively exist in the tech sector. Perhaps the right deployment of AI could complement the definition of AI optimism, as it can serve economic and altruistic purposes.
However, Vanguard is correct – to achieve such a utopian implementation: ‘Low rates of AI adoption must rise, and companies must learn how they can harness the technology’.
Some innovations that Vanguard has compared AI to include:
Maybe getting a handle on AI’s economic value would be easier if people could get their analogies straight. The inconsistent comparisons only obfuscate rather than clarify AI’s economic potential. Such comparisons are not an issue exclusive to Vanguard. It’s tempting to use alternative innovations as a template, with other comparisons including:
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Davis’ remarks somewhat counterbalance the stance of the first biggest global asset manager, BlackRock, from mid-2023. One of the three megatrends they chose to focus on was AI, particularly ‘new AI tools that can analyze and unlock the value of the data gold mine some companies may be sitting on’.
The Institutional Investor described BlackRock’s approach as ‘cautiously bullish’. Yet, like Vanguard, they acknowledge that AI has yet to fulfil its potential as, ‘At this juncture, it’s too soon to tell’. Perhaps the most delightful description of investment in generative AI is as a ‘boomlet’ by Bill Janeway, tech investor/former chair of Warburg Pincus.
Ultimately, both BlackRock and Vanguard’s stances seem united – AI’s full economic potential has not yet been uncovered. We’ll add that the technological potential of AI has also not been unlocked. Of course, 2025 could prove exciting for both (and more) – let’s be optimistic.
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