April 22, 2024 - 11:50am

A month ago, amid the euphoria of the expected revolution in artificial intelligence, shares in Nvidia were headed to the moon and beyond. Having doubled in value since just the start of the year, the company had become more valuable than most of the world’s national economies. Together, the “Magnificent Seven” tech companies (Nvidia, Amazon, Apple, Alphabet, Meta, Tesla, and Microsoft) were bigger than every stock market on the planet outside the US. The tech sector was powering the American market into record territory, sucking in investors from across the globe.

And then, Icarus-like, they started falling back to earth. After peaking at close to $1,000 a share late last month, Nvidia has fallen by a fifth. Last week alone, the Magnificent Seven together shed a trillion dollars of value. If this keeps up, the tech sector will lead the stock market into bear territory, as investors looking to book whatever profits they made in the boom head for the exits.

This was always bound to happen. The poetic paeans of how artificial intelligence would transform the world were eventually going to give way to the prose of performance. Companies were ultimately going to be judged less on what they promised, more on what they delivered. That reckoning has now begun.

Owing to its sheer novelty — ChatGPT was launched a little more than a year ago — AI had until now got an easy ride. Many of its externalities, such as its ravenous need for energy and water or its free use of data, which was potentially infringing on copyrights, had not yet been priced into its production costs. With politicians, regulators and other interested parties now starting to make demands of AI companies, investors are looking more closely at their business models.

Equally, after eagerly experimenting with ChatGPT, we all began encountering some of the technology’s bugs. Despite the impressive advances made, for many of us our primary exposure to AI still remains chatbots which leave us frustrated by bad customer service. Although the jury is still out on whether artificial general intelligence will ever come into existence — so far AI has replicated and even improved upon some specific human tasks, but it’s still unclear if it can replicate human intelligence itself — sceptics suggest the requisite range of products and services will fall short of what the enthusiasts imagine.

Moreover, what is all too easily forgotten is that the US stock market boom of the last decade was fuelled by cheap money. Since the 2008 financial crisis, the market has risen six times over. In part, that’s because in that period the US money supply grew faster than the economy, the result being a pool of excess savings that had to be parked somewhere. Add to that the fiscal largesse of governments of all stripes — Trump cut taxes, Biden boosted spending — and it was inevitable a boom would result.

But after inflation broke loose two years ago, the Federal Reserve started reducing monetary supply. The Fed always maintained that the tightening would be temporary, that once the inflation rate returned to its target it would again cut interest rates. Yet with inflation proving more tenacious than the Fed anticipated, the narrative in markets is gradually shifting. There is a dawning recognition that the era of cheap money may be over for good.

Investors are thus starting to sober up a little. Not a few of them will wake up from the party with hangovers.

John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).