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There\u2019s no avoiding the hype surrounding AI these days. Promises of new developments like personal robot assistants<\/a> and miracle cancer cures<\/a> are ubiquitous as executives take every opportunity to emphasize<\/a> their AI chops to enthusiastic investors\u2014and slightly less enthusiastic<\/a> consumers.<\/p>\n Not everyone has been blown away by the AI fanfare, however. James Ferguson, founding partner of the UK-based macroeconomic research firm MacroStrategy Partnership, fears investors\u2019 AI exuberance has created a concentrated market bubble that\u2019s reminiscent of the dot-com era.<\/p>\n \u201cThese historically end badly,\u201d Ferguson told Bloomberg\u2019s Merryn Somerset Webb in the latest episode of the Merryn Talks Money<\/em><\/a> podcast. \u201cSo anyone who\u2019s sort of a bit long in the tooth and has seen this sort of thing before is tempted to believe it\u2019ll end badly.\u201d<\/p>\n The veteran analyst argued that hallucinations\u2014large language models\u2019 (LLMs) tendency to invent facts, sources, and more\u2014may prove a more intractable problem than initially anticipated, leading AI to have far fewer viable applications.<\/p>\n \u201cAI still remains, I would argue, completely unproven. And fake it till you make it may work in Silicon Valley, but for the rest of us, I think once bitten twice shy may be more appropriate for AI,\u201d he said. \u201cIf AI cannot be trusted\u2026then AI is effectively, in my mind, useless.\u201d<\/p>\n Ferguson also noted AI may end up being too \u201cenergy hungry\u201d to be a cost effective tool for many businesses. To his point, a recent study from the Amsterdam School of Business and Economics<\/a> found that AI applications alone could use as much power as the Netherlands by 2027.<\/p>\n \u201cForget Nvidia<\/a> charging more and more and more for its chips, you also have to pay more and more and more to run those chips on your servers. And therefore you end up with something that is very expensive and has yet to prove anywhere really, outside of some narrow applications, that it\u2019s paying for this,\u201d he said.<\/p>\n For investors, particularly those leaning into the AI enthusiasm, Ferguson warned that the excessive tech hype based on questionable promises is very similar to the period before the dot-com crash. He noted that during both of these periods, market returns were concentrated in tech stocks that traded based on Wall Street\u2019s sky-high earnings growth estimates.\u00a0<\/p>\n But despite those lofty forecasts, the dominant hardware giants of the dot-com era, Cisco and Intel<\/a>, have largely disappointed investors ever since. Ferguson argued today\u2019s AI hardware hero, Nvidia, might experience a similar fate, particularly given its elevated valuation.<\/p>\n \u201cWhat multiple of sales is Nvidia a good deal on if you think that it might only have\u2014no matter how stratospheric the growth rate at the moment\u2014if you think that it\u2019s probably not going to be a player in a decade\u2019s time?\u201d he asked, implying Nvidia might not be worth the current price tag of nearly 40 times sales investors are paying.<\/p>\n Despite his argument that AI-linked tech stocks like Nvidia are highly overvalued, Ferguson admitted that no one can predict when a bubble will end. This dynamic leads many bearish investors to feel \u201ccompelled to play\u201d in the markets even when stocks look pricey, according to the analyst\u2014and that\u2019s a great way to get hurt.<\/p>\n \u201cI mean, it\u2019s certainly what was happening in the dotcom [bubble], for example, where almost anybody who wasn\u2019t a retail punter was looking at these things and saying, \u2018well, it can\u2019t last, but having said that, if it lasts one more quarter and I\u2019m not playing, I\u2019ll lose my job,\u2019\u201d he explained.<\/p>\n The good news, according to Ferguson, is that because the current stock market bubble is so concentrated in AI-linked stocks, there is still value out there.<\/p>\n Of course, there will be widespread pain for investors if the AI bubble bursts. But after that, Ferguson recommended looking at the currently unloved U.S. small-cap stocks, which may benefit from interest rate cuts and aren\u2019t highly valued.<\/p>\n \u201cThere\u2019s a lot of value to be found in the U.S. The trouble is that that value is to be found in good old fashioned ways, trawling through small caps and looking for businesses that are growing in a good old fashioned, steady way,\u201d he said.<\/p>\n<\/div>\n\nSubscribe to the CEO Daily newsletter to get global CEO perspectives on the biggest stories in business. Sign up for free<\/a>.<\/div>\n