Two risks to the AI tech rally

Yardeni Research analysts have raised concerns about the ongoing AI technology rally, identifying two major risks that could potentially derail the sector’s explosive growth.

While AI promises revolutionary changes across industries, there are signs of “AI Inflation” that warrant caution.

Firstly, the unprecedented flow of funds into AI startups is a red flag. Yardeni Research highlights that “investors have poured $330 billion into 26,000 AI startups over the past three years,” significantly more than in previous years.

While this influx of capital has fueled innovation, it has also led to a crowded market with many companies struggling to turn a profit, according to the firm. For instance, they note Stability AI has faced financial difficulties, resulting in layoffs and the departure of its CEO.

Similarly, they add that Inflection AI, despite raising over $1.5 billion, saw its leadership leave for Microsoft (NASDAQ:). The concern is that “if AI startups run out of cash, their suppliers could find AI-related revenues dry up quickly.”

Secondly, analysts caution that the claims made by AI industry leaders suggest a potential bubble. Nvidia (NASDAQ:)’s CEO, Jensen Huang, has described their Blackwell architecture platform as possibly “the most successful product in the history of the computer.”

However, analysts caution that they “don’t believe the semiconductor cycle is dead,” and AI’s efficiency gains may not entirely circumvent the industry’s inherent volatility.

Yardeni Research acknowledges AI’s potential but notes that “doubling the size of the world economy in a decade is quite a claim.”

In summary, Yardeni Research feels that while AI holds significant promise, these two risks—excessive capital influx and overhyped expectations—highlight the need for investors to remain cautious amid the current AI tech rally.