by Brian Levitt, Global Market Strategist, Invesco
- Artificial intelligence is a nebulous concept that carries different meanings for different people. In the most basic form, it mimics human intelligence and decision-making by processing and categorizing data to respond to a prompt. This narrow AI is designed to do something specific.
- With the rise and release of ChatGPT, generative AI seemed to take the world by storm. The technology has been around for a while. But more computing power and better data have led to incremental improvements. These newer systems give the impression of understanding and creativity.
- Generative AI is essentially a prediction model. In terms of text, a chatbot can predict the words that flow from a question. It’s trained to respond with the most likely words. But the answer won’t necessarily be the same every time. The tools are probabilistic rather than deterministic, meaning the sort of dice roll that happens each time leads to different responses.
- Generative AI systems have proved capable of creating in mediums besides text, including images, audio, and video. The technology has moved beyond science fiction to real-world applications that the public can experiment with. The tools are flexible enough to respond naturally in many different scenarios. This has created excitement and apprehension.
- It’s not clear if AI will ever be able to do any of the more intellectually challenging jobs. The technology can learn, and it can create increasingly convincing facsimiles that give impression of thinking. But AI doesn’t have ideas. It can’t critically analyze a problem. The technology recognizes interconnected topics based on training data. Rather than taking over for knowledge workers, the tool will more likely be paired with them as part of their regular workflows.
- Ashley described three types of companies that may benefit from AI: enablers, adopters, and responders. Enablers are companies with products and services to help build and train AI models, such as producers of semiconductors, mega-cap tech names, and owners of large stores of data. Adopters are companies that can integrate AI models to create efficiencies in their businesses. Responders are companies that react to AI’s implications in society.
- Companies involved in the AI craze have created some euphoria in the market, illustrated by earnings and valuation. In terms of earnings growth, mega-cap tech names have been marked up about five percentage points, which Ashley thinks look reasonable.1 Valuation has moved from 36 times earnings earlier this year to 51 times earnings.1 While that’s a bigger jump, it’s not necessarily outlandish, Ashley said.
1 Source: Bloomberg, L.P., as of July 25, 2023