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Riding the AI Wave: The Golden Opportunity for Long-Term Investors

The top site for Artificial intelligence (AI), Openai.com saw traffic increase a record 54.21% last month – more than any other of the world’s leading websites. It’s most popular feature, ChatGPT is closing in on one billion unique users every month.

AI hype has reached new heights in recent months, and as more companies race to implement AI strategies, investors are zooming to get in on the action.

Programs such as ChatGPT are showing the world the true potential of the technology and what a future with ubiquitous AI-generated content may look like. A paradigm shift is rippling across the economy as industry leaders position their firms for the revolution to come.

The economic impact could be profound. Leading consultancy PwC, for instance, estimates AI-related productivity will contribute 15.7 trillion worth of economic output to the world by 2030 – almost the equivalent of another whole Chinese economy.

Investment banks foresee huge gains, with Goldman Sachs recently predicting AI could spur S&P 500 profits by 30% or more over the next ten years. In May, many large tech giants skyrocketed to new highs after revising earnings estimates significantly higher due to insatiable demand for AI chips and technologies.

As generative AI gets up and away, seasoned investors are angling to identify winners while trying to avoid unwittingly buying into a bubble. Yet how does the average retail investor make the most of this vast and still nascent space?

Artificial Bull Run?

AI is turning the outlook for tech stocks right around. Last year’s stock market rout left tech stocks reeling, with Meta, Amazon, and Tesla sustaining huge losses while energy, defense, and other industries boomed.

Until recently, the prevailing narrative was that tech was undergoing a long overdue downsizing. Mass layoffs of tens of thousands of tech workers and a plunge in industry IPOs seemed to spell the end of a golden era.

Yet, the arrival of ChatGPT in November last year marked a turning point, unleashing a torrent of speculation which has buoyed tech stocks this year. Despite tightening monetary conditions, the broad market index S&P 500 has lifted nearly 10% in 2023.

The rally has been mainly driven by a handful of tech companies, namely Microsoft, Nvidia, AMD, Google, and Meta, with investors betting these firms are best positioned to capture the predicted surge in AI-powered productivity and profits in the coming years.

Could AI move markets out of the bearish rut and into bull territory?

“I do not believe that this new development will create a sustained bull run; interest rates have risen too much to be affected by the promise of AI. It cannot overcome the historical rate increases,” says Doug Greenberg, Founder and President of Pacific Northwest Advisory.

Nonetheless, Greenberg sees green fields over the longer-term horizon. “The promise of AI is extraordinary, and the hype could be warranted,” he says. “At this point, clients have not asked about investing in AI as I believe that most do not understand how it works and the opportunity.”

“It is still very early in the scope of how AI will be used…there are many startups that are trying to take advantage, and there will, of course, be a flushing out of the winners and losers,” he adds.

“I do believe that the larger companies (MSFT, AMZN, etc.) with teams of engineers [already] will have a competitive advantage, but the revenue will still be dwarfed by their main businesses.”

Diversified Impact

There are already a plethora of use cases for the technology, from generating content to AI legal advisors and even AI-powered tax apps that help optimize your federal income tax filing. Yet, considering the technology is still in its infancy, there is potential for investors to tap AI to steadily build residual income over the long term.

“We think that AI has established itself with demonstrated use cases and think that the long-term investment outlook is strong,” says Bryan Courchesne, CEO of Digital Asset Investment Management (DAIM).

“Our advice to individual investors is to avoid trying to pick a winner and instead use a more passive approach,” Courchesne adds. “There will be companies that benefit immensely, but it is too early to know who they will be. Investing in the Nasdaq, through QQQ, is probably the best bet for individuals at the moment.” 

Other advisors see merit in taking a more targeted strategy. “Palantir’s valuation is currently near its lowest point, though it is not considered cheap,” says Jorey Bernstein, CEO of Bernstein Private Wealth, referring to a Colorado-based AI-focused software firm co-founded by legendary entrepreneur Peter Thiel.

“The stock is selling for about 13 times trailing and ten times next year’s sales, making it a reasonable price for those who believe in the company’s projected double-digit revenue growth and quadrupling of earnings per share by 2024,” he adds. “Despite this, value investors may not be convinced. Additionally, Palantir’s expertise in AI and the technology’s rapid adoption may mean that growth expectations for the company are conservative.”

For investors who typically buy up leading index-tracking ETFs, stock picking may not be the right fit. For broader exposure to the whole industry, rather than select stock picks, buying AI-focused ETFs, like Ark Autonomous Technology & Robotics ETF (ARKQ), may be the more optimal strategy.

Artificial intelligence is poised to transform many industries and unleash a whole new era of economic productivity. Investors who got in early are already reaping the rewards, although, as always, past performance is no guarantee of future results.

Just as with digital assets, the metaverse, and other fashionable technologies of the past few years, AI is not immune from the effects of speculative bubbles. Going forward, investors will need to look beyond the current excitement over AI if they are to play the long game in this space.

Josh Dudick

Josh is a financial expert with over 15 years of experience on Wall Street as a senior market strategist and trader. His career has spanned from working on the New York Stock Exchange floor to investment management and portfolio trading at Citibank, Chicago Trading Company, and Flow Traders.

Josh graduated from Cornell University with a degree from the Dyson School of Applied Economics & Management at the SC Johnson College of Business. He has held multiple professional licenses during his career, including FINRA Series 3, 7, 24, 55, Nasdaq OMX, Xetra & Eurex (German), and SIX (Swiss) trading licenses. Josh served as a senior trader and strategist, business partner, and head of futures in his former roles on Wall Street.

Josh's work and authoritative advice have appeared in major publications like Nasdaq, Forbes, The Sun, Yahoo! Finance, CBS News, Fortune, The Street, MSN Money, and Go Banking Rates. Josh currently holds areas of expertise in investing, wealth management, capital markets, taxes, real estate, cryptocurrencies, and personal finance.

Josh currently runs a wealth management business and investment firm. Additionally, he is the founder and CEO of Top Dollar, where he teaches others how to build 6-figure passive income with smart money strategies that he uses professionally.