Great Investments & Pips (Public)

Luck is opportunity meeting preparation.

The AI boom has finally encountered an unpleasant and unfamiliar concept: gravity. For months, investors convinced themselves that every company remotely associated with artificial intelligence would enjoy unlimited growth, unlimited profits and, apparently, unlimited valuations. The narrative was so compelling that traditional financial analysis became an inconvenience. Why examine cash flows when you can simply add "AI" to a presentation deck and watch the share price levitate? Now reality has arrived carrying a calculator. Technology shares are falling across the globe. Nasdaq futures are under pressure. South Korea's Kospi has suffered a sharp correction. Samsung and SK Hynix have discovered that shares can travel downwards as well as upwards. Chinese equities have wandered into bear market territory. Even some of the market's most celebrated AI beneficiaries are finding that investors who were happy to suspend disbelief on the way up are becoming remarkably demanding on the way down. This is not, at least yet, an economic story. Consumers are not suddenly poorer. Employment has not collapsed. Spending has not disappeared. The world's appetite for buying things remains stubbornly intact. This is instead a valuation story. The market is starting to ask a question that should probably have been asked before several trillion dollars of market capitalisation were created: "Exactly how much profit will all this AI spending generate?" For years investors worried that companies were underinvesting. Today they are worrying that hyperscalers may be engaged in the largest corporate spending spree since Roman emperors discovered marble. The assumption has been that every dollar spent on AI infrastructure will inevitably generate several dollars of future returns. History suggests that whenever everyone assumes something is inevitable, it rarely is. Meanwhile, in the Strait of Hormuz, confusion remains the dominant geopolitical commodity. Shipowners reportedly cannot always determine whether they should be listening to Iranian instructions, American instructions, or simply praying for the best. The result is that shipping volumes are normalising with all the speed and confidence of a nervous cat approaching a bathtub. Markets appear comfortable with this uncertainty because uncertainty has become familiar. Investors are remarkably adaptable. Given enough time they can become relaxed about almost anything, including geopolitical flashpoints through which a substantial portion of the world's oil supply passes. Back in Britain, the country is preparing for its seventh Prime Minister in a decade. The market reaction has been one of profound indifference. This is entirely rational. Investors understand that changing the person reading the script does not necessarily alter the script itself. Westminster remains obsessed with personalities because personalities generate headlines. Markets remain obsessed with borrowing, taxation, regulation and growth because those determine returns. The average voter believes Prime Ministers run the economy. The gilt market knows they mostly inherit it. The larger lesson from today's market action is that investors are rediscovering the distinction between a great technology and a great investment. The two are not always the same thing. Railways changed the world and bankrupted investors. The internet changed the world and bankrupted investors. Artificial intelligence may well change the world. That does not mean every AI share price deserves to change the laws of valuation. (Image: YTD performance)

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