AI Pushes $4 Trillion Records, But Layoffs Could Pop the Bubble
AI continues to be the primary driver of the markets, but concerns are mounting.
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The market continues to move significantly higher as the AI narrative continues to boost equities.
Qualcomm (QCOM) moved 11% higher on Monday after announcing new chips targeting the burgeoning AI space. This helped take the NASDAQ 1.86% higher on the day and add more than $20 billion to Qualcomm’s market cap. OnTuesday, it was Microsoft’s (MSFT) turn to keep the AI bonfire going. The tech giant signed an agreement with OpenAI that valued Microsoft’s approximate 27% stake in the emerging AI colossus at roughly $135 billion. This announcement was a key driver for the NASDAQ to move another .8% higher on the day.
The latest leg of the tech rally pushed both Microsoft and Apple (AAPL) over the $4 trillion with a "T" market cap threshold for the first time — significantly larger than either the annual GDP of either the U.K. or France. I don’t know if this milestone points more to how a potential AI bubble is forming here or how lethargic economic growth has become in Europe for many years now. Perhaps it symbolizes both trends.
Famed billionaire hedge fund manager Ray Dalio just noted that the market has become very bifurcated and Big Tech has driven roughly 80% of the gains in equities. He joined the growing chorus of voices cautioning that the AI narrative might be fueling a potential bubble. Dalio did additionally observe this bubble could inflate further and may not pop until the Federal Reserve starts to raise rates again, an event that doesn’t appear to be on the short-term horizon as the central bank is projected to cut rates at least once by 25 BPS, if not twice, before year end.
I have two primary concerns around the AI narrative. The first is wondering if generative AI will be able to generate the revenue necessary in a relatively short time to justify the huge investments being made to build massive data centers and other AI related infrastructure. This is especially true as names like Meta Platforms (META) and Oracle (ORCL) are no longer funding these investments entirely from the cash from their balance sheets and free cash flow.
The second worry I have is whether all of this investment in AI realizes capabilities that quickly replaces a good chunk of the labor force, pushing the unemployment rate significantly higher. Despite record revenues and almost $80 billion devoted to cap. ex. in FY204, Amazon (AMZN) just announced that it now plans to lay off 14,000 corporate positions, although Reuters has reported this reduction in force to number closer to 30,000. United Parcel Service just announced it has pared its workforce by some 48,000 positions this year, 14,000 of which came from corporate management.
It is important to note that tariff impacts, over hiring after the pandemic, and protecting margins are being cited as the main drivers for these layoffs. AI is barely being felt on this front to date. However, that is going to change, and perhaps quite quickly in the quarters and years ahead. What happens to Amazon’s warehouse workforce when robots become available to do many of the same functions? What is the impact to UPS drivers when driverless technology becomes widespread? Will new jobs spring up to replace lost ones at the same pace or does unemployment see a large spike upward?
And those are some of the doubts I have around the AI revolution, although I have no doubt that the AI narrative continues to be the straw that is stirring the drink as far as the equity markets are concerned.
At the time of publication, Jensen was long AMZN and QCOM.
