Goldman Sachs Top Equity Analyst: AI Won't Spark an Economic Revolution, the Bubble Will Eventually Burst
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Goldman Sachs Top Equity Analyst: AI Won't Spark an Economic Revolution, the Bubble Will Eventually Burst
The economic benefits brought by AI are not even comparable to those of smartphones and the internet.
Navigating Web3 tides with focused insightsBy Li Dan
Source: Wall Street Insights
Jim Covello, Goldman Sachs' global head of equity research, has recently cast doubt on artificial intelligence (AI) — the primary driver behind this year's surge in U.S. stocks.
With over three decades of experience on Wall Street, Covello knows how painful it can be to bet against an expanding tech bubble. Markets have a way of creating wealth month after month, even when the latest technological breakthroughs clearly fall short of expectations. Covello believes this could happen with AI as well, making it dangerous — even foolish — to start shorting companies like Nvidia.
Covello argues that while the bursting of the bubble may not happen this year, or even next year, it will eventually come. In his view, the hundreds of billions of dollars that companies are spending on AI will not spark the next economic revolution — nor will its impact match that of smartphones or the internet. When this reality becomes clear, all stocks that have surged on AI prospects will decline.
In his report, Covello stated:
"Most technological transformations in history, especially those that were transformative, replaced very expensive solutions with very cheap ones. Replacing jobs with extremely costly technology is almost entirely the opposite."
"What trillion-dollar problem will AI solve? Replacing low-wage jobs with expensive technology is completely contrary to the previous technological shifts I’ve observed closely in the tech industry over the past 30 years."
Covello believes AI "must be able to solve complex problems to justify its high costs, which is not what it was designed for." AI technology is extremely expensive; even using machine learning to replace humans does not reduce costs.
The report notes: "We found that using AI to update historical data in our company models is faster than manual updates by humans, but costs six times more." He added that costs would need to drop significantly before AI-powered automation becomes affordable for widespread use.
AI proponents argue that the technology is still in its infancy, much like the internet during the dot-com bubble of the 1990s, and that AI costs will eventually decline. But even then, Covello points out, the internet still had a cost advantage. "Amazon could sell books at lower cost than Barnes & Noble because it didn’t have to maintain expensive physical stores."
"The idea that technology is usually expensive at first and then becomes cheaper is a revision of history," said Covello.
Covello’s concerns go beyond just high costs. He simply doesn’t believe AI will become the breakthrough invention many expect. So far, AI lacks a 'killer app' — a point even his more optimistic colleagues at Goldman Sachs have acknowledged in their reports.
Since late 2022, the AI hype has driven nearly $16 trillion in market value gains for the S&P 500. Now, a small but growing group of market observers, led by Covello, are questioning a core premise of the AI narrative: that the immense power of large language models (LLMs) will usher in capitalism’s next great era, where increasing numbers of tasks are handed over to intelligent machines, boosting corporate profits, efficiency, and growth.
A handful of skeptics, including Covello, argue instead that commercial expectations for AI may be wildly exaggerated — and if tech giants reconsider their massive investments in AI, stock markets could face a correction.
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