Rainer Michael Preiss – Global Markets Commentary
Artificial intelligence may prove to be one of the most transformative technologies of the twenty-first century. It could fundamentally change how businesses operate, how economies generate productivity and how individuals work and communicate. Yet technological revolutions and successful investments are not necessarily the same thing.
The history of financial markets demonstrates that investors can correctly identify a revolutionary technology while dramatically overestimating the financial returns available from companies associated with it.
Railways transformed transportation, electricity transformed industry, and the internet transformed communication and commerce. Nevertheless, each technological revolution was accompanied by periods of excessive speculation, unrealistic valuations and painful market corrections.
Artificial intelligence may be following a similar path.
A recent Bloomberg Economics analysis highlights the potential economic consequences of a significant correction in AI-related equities. Its scenario suggests that an AI-driven market crash could reduce global economic output by approximately $1.6 trillion during the first year.
For private clients and family offices, the central question is therefore not whether artificial intelligence will change the world. It almost certainly will. The more important question is whether current market valuations adequately reflect the costs, risks and uncertain timing of the transformation.
The Difference Between Technological Success and Investment Success
The extraordinary rise of AI-related equities has been supported by genuine technological progress, substantial corporate investment and expectations of significant future productivity gains.
Semiconductor manufacturers, cloud-computing companies, data-center operators and electricity infrastructure providers have benefited from unprecedented demand for computing capacity.
Companies such as Nvidia, Microsoft, Alphabet, Amazon and Meta have become central to the investment narrative.
However, the economic benefits of artificial intelligence remain difficult to quantify.
While AI applications are becoming increasingly sophisticated, widespread implementation across businesses requires investment in software, employee training, organizational restructuring and integration with existing systems.
These processes take time.
The commercial challenge is particularly important. Companies developing AI models must demonstrate that revenues and profits can ultimately justify the enormous expenditure required to build and operate the underlying infrastructure.
Competition is also intensifying. Falling prices for AI services and the development of increasingly capable open-source models could limit the pricing power of individual providers.
Investors should therefore distinguish between the rapid adoption of a technology and the ability of companies to earn sustainable returns from that adoption.
A successful technological revolution does not guarantee that every company participating in it will become a successful long-term investment.
What Would an AI Bubble Burst Look Like?
Bloomberg Economics has modelled a hypothetical AI-related financial-market correction involving a 20% decline in the S&P 500, wider corporate credit spreads, increased economic uncertainty and a temporary interruption in data-center investment.
The results illustrate how an equity-market correction could develop into a broader economic shock.
Under the scenario, global GDP would be approximately 1.3% lower in the first year, equivalent to an estimated $1.6 trillion reduction in economic output.
The United States would experience a significant slowdown, with economic growth potentially declining by 1.5 percentage points relative to the baseline forecast for 2027.
The model also suggests that the American economy could experience two consecutive quarters of contraction.
Importantly, these estimates are scenario calculations rather than predictions. The severity of any actual correction would depend on market valuations, financial leverage, monetary-policy responses and the resilience of household and corporate balance sheets.
Nevertheless, the exercise highlights an important vulnerability: AI has become sufficiently significant to financial markets and corporate capital expenditure that a reversal in investor confidence could have consequences extending far beyond the technology sector.
Taiwan and South Korea: The Hidden Concentration Risk
One of the most striking conclusions of the Bloomberg Economics analysis concerns the exposure of Taiwan and South Korea.
Taiwan has become indispensable to the global semiconductor industry, particularly through Taiwan Semiconductor Manufacturing Company.
South Korea plays an equally important role in advanced memory chips through Samsung Electronics and SK Hynix.
Both economies have benefited substantially from the expansion of AI infrastructure.
However, their economic success also creates vulnerability.
Bloomberg's scenario estimates that an AI investment collapse could reduce Taiwan's annual GDP by approximately 4% relative to its baseline and South Korea's by more than 2%.
These estimates illustrate how a technology-sector correction could affect manufacturing output, exports, employment and domestic economic confidence.
For international investors, this raises a critical portfolio-construction issue.
Holding American technology equities alongside Taiwanese semiconductor manufacturers and Korean memory-chip producers may appear to provide geographical diversification.
In economic terms, however, these investments may be exposed to the same underlying risk: the sustainability of global AI infrastructure expenditure.
Geographical diversification does not necessarily provide economic diversification when multiple investments depend on the same source of demand.
This distinction deserves particular attention in globally diversified equity portfolios.
The United States: Wealth Effects and Economic Growth
The American economy would be affected through several interconnected channels.
A sharp decline in technology shares would reduce household financial wealth, potentially weakening consumer confidence and discretionary spending.
Businesses facing lower equity valuations and greater uncertainty could postpone investment, reduce hiring and reconsider expansion plans.
At the same time, a slowdown in data-center construction would affect equipment suppliers, construction companies, electricity infrastructure providers and financial institutions financing these projects.
Credit markets could experience additional pressure as investors reassess the financial strength of companies dependent on continued AI investment.
However, an AI-related correction should not automatically be compared with the global financial crisis of 2008.
Many leading technology companies possess substantial cash reserves, established businesses and strong balance sheets.
A more appropriate historical comparison may be the bursting of the internet bubble in 2000, when equity valuations collapsed despite the continued development and eventual commercial success of the underlying technology.
The distinction between a market correction, an economic recession and a systemic banking crisis remains essential.
China: A Different Artificial Intelligence Investment Proposition
China presents a potentially different investment case.
Chinese technology companies participate in AI development, cloud computing, digital commerce and industrial automation, but their valuations and capital-market dynamics differ from those of American technology leaders.
Some Chinese technology businesses may offer comparatively attractive valuations and established cash-generating operations.
Furthermore, China's AI development increasingly emphasizes cost efficiency, domestic semiconductor capabilities and applications across manufacturing and consumer services.
Nevertheless, China would not be insulated from a global AI correction.
Weaker American demand, declining global risk appetite and pressure on international technology valuations could affect Chinese equities.
Geopolitical restrictions, regulatory uncertainty and corporate-governance considerations also remain important.
For private clients, China may offer selective diversification within the broader technology universe, but it should not be regarded as an automatic hedge against an AI-related downturn.
Bonds, Gold and Defensive Assets
An AI-driven market correction could also reshape opportunities across asset classes.
If weaker economic growth and declining inflation encouraged central banks to reduce interest rates, high-quality government bonds could benefit from falling yields.
Gold may also attract demand as investors seek protection against financial-market uncertainty and reassess the outlook for real interest rates.
However, gold prices are influenced by several variables, including the U.S. dollar, central-bank purchases and global liquidity conditions.
Defensive equity sectors such as healthcare, utilities and consumer staples may demonstrate greater earnings resilience than highly cyclical technology infrastructure businesses.
Cash and short-duration fixed-income instruments could provide valuable liquidity during periods of market stress.
Yet no asset class offers guaranteed protection. In severe market corrections, investors may initially sell otherwise attractive assets to raise liquidity.
The objective should therefore be portfolio resilience rather than attempting to identify a single perfect defensive investment.
Portfolio Construction: The Danger of Hidden Correlations
The greatest lesson for private clients concerns portfolio construction.
Over recent years, the extraordinary performance of a relatively small group of American technology companies has increased concentration within major equity indices.
Investors holding global index funds, U.S. equity funds, technology ETFs and semiconductor funds may unknowingly possess substantial overlapping exposure.
Adding Taiwanese and Korean technology equities can increase that concentration further.
This creates the possibility that apparently diversified portfolios respond similarly to a reversal in AI-related expectations.
The distinction between strategic and tactical asset allocation becomes particularly important.
Strategic allocations should reflect long-term investment objectives, liquidity requirements and risk tolerance. Tactical adjustments can address excessive valuations, changing economic conditions and emerging opportunities.
Investors should examine not only the number of securities or funds held, but also the underlying economic drivers of portfolio returns.
Diversification across sectors, regions, currencies, investment styles and asset classes may provide greater resilience than simply owning more technology-related securities.
Conclusion: The Technology Can Succeed Even if the Investment Bubble Bursts
Artificial intelligence may ultimately generate enormous economic benefits. It could improve productivity, accelerate scientific research, transform healthcare and create entirely new industries.
However, financial markets frequently underestimate the time required for revolutionary technologies to generate sustainable commercial returns.
A correction in AI-related equities would not necessarily represent a failure of artificial intelligence. It could simply reflect a reassessment of valuations, profitability expectations and the cost of capital.
For private clients, the appropriate response is neither unquestioning enthusiasm nor indiscriminate pessimism.
Instead, investors should recognize that technological innovation, corporate profitability and shareholder returns are three different concepts.
The Bloomberg Economics scenario serves as a reminder that an AI-related correction could have consequences extending well beyond Silicon Valley, particularly for the United States, Taiwan and South Korea.
The greatest risk may not be that artificial intelligence fails to transform the world, but that investors have already priced in too much of that transformation, too quickly.
Successful long-term investing requires participating in structural opportunities while maintaining valuation discipline, genuine diversification and sufficient liquidity to withstand inevitable periods of market volatility.
The history of technological revolutions suggests that the greatest long-term winners are not always the companies that attract the most excitement during the initial investment boom.
For private clients, understanding that distinction may prove more valuable than attempting to predict precisely when an AI bubble might burst.
Rainer Michael Preis
Global Markets Commentary. Partner & Portfolio Strategist, DAS Family Office
Disclaimer: This article is provided for general information and educational purposes only. It does not constitute investment advice, an offer or a recommendation to purchase or sell any security or financial instrument. The views expressed are subject to change without notice. All investments involve risk, including the possible loss of principal. Investors should consider their financial circumstances, investment objectives and risk tolerance and seek appropriate professional advice before making investment decisions.
