Last week saw a heavy and rapid sell-off in a swathe of software-related companies, a dramatic move that was linked to Anthropic’s launch of an AI-driven workplace assistant. These share price falls were characteristic of an environment that has moved from AI optimism to AI uncertainty. This is not simply uncertainty about the efficacy of vast capital expenditure, but the jeopardy surrounding which businesses might suffer material disruption from the next leg of AI development. This doesn’t just mean nervous times for some growth investors, but maybe changes how all investors think about risk.

Ain’t Nothing Like The Real Thing

Although it may sound counter-intuitive, one potential impact of the quick and unpredictable progress of AI is a return to favour of old economy stocks. Much of the past 15 years has been dominated by new economy stocks – best symbolised by US technology companies – at the expense of more traditional industries, such as resources, financials and utilities. The market has favoured companies with high price to book ratios often supported by intangible assets.*

In a world where there is increasing uncertainty over which areas will be most at risk from AI disruption, maybe this phenomenon will change; investors might start to prefer companies where the chance of the business being upended seems significantly lower. It feels easier for AI to do significant damage to the model of a software company than it does to a miner, for example.

AI progression means that certain types of business now hold a wider range of outcomes. Almost certainly some investors will find that the intangible assets of their favoured company were intangible for a reason – they didn’t exist. **

The risk attached to businesses vulnerable to AI with intangible assets and once seemingly impervious moats is likely to be a little higher, as will the return required for holding them. It is tough to be an investor if you are living in fear of the next release from Anthropic or OpenAI.

We may enter an environment where (certainly compared to recent years) investors start to value real things a little more and ephemeral things a little less.

The Best and Worst Time for Active Investors

Every consequential investment theme gets turned into an argument for or against active management – depending on our prior – and AI disruption is no different.

Advocates of active investing will assess the current environment and say something along the lines of:

“AI will create a huge gulf between companies that win and companies that lose. Investors who truly understand businesses and the industries they operate in will thrive.”

Conversely, index fund supporters will say:

“There is no reasonable way of knowing which companies will be the beneficiaries of AI and which will be the victims, this makes concentrated stock picking more dangerous than ever. The cost of being wrong has never been higher. It is far better to own everything, and make sure you hold the winners.”

Who is right? Take your pick. What seems incontrovertible is that certain business models will be negatively impacted – perhaps drastically so – while others will benefit. This will create dispersion and volatility.

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The sharp decline in the shares of software companies was not fundamental (yet), it was a case of investors predicting how other investors might react to the latest AI developments. We don’t know how genuine these concerns are – and that is the problem. AI is causing huge uncertainty and it is impossible to know what the consequences will be. There will be continued bouts of volatility and only time will tell what is speculation borne of temporary doubts, and what represents genuine and profound change.

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* It is certainly fair to say that outside of the US, value as a style has been finding more favour in recent years, but the dominance of the US and the Magnificent 7 sometimes makes this a little hard to notice.

** Over a longer horizon there are clearly broader (and more important) questions about how AI will impact society and economies.

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My first book has been published. The Intelligent Fund Investor explores the beliefs and behaviours that lead investors astray, and shows how we can make better decisions. You can get a copy here (UK) or here (US).

All opinions are my own, not that of my employer or anybody else. I am often wrong, and my future self will disagree with my present self at some point. Not investment advice.