Should we be worried about AI market concentration?
An interesting statistic caught my eye this week on reading the IMF’s report into global financial stability.
The report cited a decades-old measure known as the Herfindahl-Hirschman index.
While hardly catchy, the Herfindahl-Hirschman index is a simple tool for assessing the dominance of certain players within the market. The higher the number, the greater the market concentration risk.
The chart the IMF produced on price to earnings ratios in the US S&P 500, calculated using the index, was eye-opening.
The IT sector accounts for a weight of 35 per cent of the S&P, similar to during the dot-com bubble, but with the Magnificent 7 alone accounting for 33 percent of the index, economists said.
“Consequently, a measure of concentration risk based on the Herfindahl-Hirschman Index is
now substantially higher than during the dot-com bubble,” the IMF said.
It would be a stretch to infer from this observation that we are on the cusp of another dotcom-style market meltdown.
But if the Mag 7 tech giants don’t deliver the expected return on the tens of billions of pounds they are pumping into AI data centres, this could precipitate a deep downturn across the whole industry, or as the IMF neatly puts it: “valuations would collapse.”
Who would be to blame?
If that happens, investors will soon start pointing the finger. Did the AI giants spread too much hype? Were AI chatbots really good enough to supplant whole sections of the workforce?
It’s hard to judge at this stage, but as the FT helpfully pointed out last month, ChatGPT maker OpenAI’s current spend on marketing and employee equity options alone exceeds its entire revenue – hardly sustainable.
While a burst AI bubble would send shockwaves around the world, it would still, for the most part, be a problem for US equity markets: that is where the lion’s share of investment has been deployed.
Back in Blighty, we are just happy to be welcoming the IPO of a tinned food business, Princes. And one day we may be grateful for that – for when the AI crash comes, the bankrupt tech bros may discover a penchant for baked beans and canned ham even greater than our own.