The first quarter has featured a not-so-subtle shift in investors’ risk appetite, especially when it comes to the surge in artificial intelligence investment.
This changing view reflects mounting concerns on several fronts.
To begin with, investors are increasingly questioning whether these extraordinary investments in AI will pay off, while at the same time investors have paradoxically punished the valuations of those companies that stand to lose as AI takes hold.
Second, as AI sucks up capital from every corner of the financial system, that spending is most likely crowding out other industries deserving of fresh investment.
Third, as firms seek to increase their own resilience and build moats around their core interests, demand for commodities is rising which, along with the crowding out of other investments, will result in higher rates and elevated inflation.
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This dynamic makes for increasing competition for scarce capital and energy, all of which will be part of the economic narrative for the remainder of the business cycle.
Finally, when the rising concern surrounding private credit is added to the mix, the result is pressure on equity valuations.
