Bad AI cholesterol vs good AI cholesterol

As pre-Diwali dhamakas go, Big Tech's 'Magnificent 7' lost more than $1 tn in combined market value on Thursday. The rout in tech stocks, following the US midterms, is a fallout of a combo of concerns over AI spending and inflation. Democrat-isation of the US is expected to slow building of data centres. Potential escalation of the US' hostilities with Iran will keep oil prices high, forcing the Fed to raise interest rates. Spending slowdown plus higher interest rates heighten the likelihood of the AI bubble popping. Much of the AI infra build-up is funded by debt, and expensive credit will control growth of the tech. Big Tech doing the heavy lifting has not announced any fall-off in spending - yet. So, investors will now contend with two sets of AI players: chaps who already have significant data centre capacity; and others who'll face mounting legislative and borrowing challenges in scaling up. This will sort 'winners' from 'losers' as investors review their AI bets.

The tech, meanwhile, is getting better. The pricing model for AI is also transiting towards user fees as businesses deploy digital agents to automate processes. Employee-level productivity gains are yet to be converted into overall operational cost-saving and revenue increase. Organisational constraints have more to do with structured change management than with any tech limitation. This barrier should fall as AI adoption rises to most businesses. Companies are now scaling AI across the organisation, instead of keeping them in isolated pilots. More companies are moving towards an agentic workforce that can handle multi-step workflows.

A deep correction in AI valuations will follow - if the tech stops delivering additional productivity gains, spending on AI infrastructure collapses, or if debt costs become unserviceable. None of these outcomes is imminent. Market reaction tends to be exaggerated, and investors will become more discerning about separating good 'AI cholesterol' from bad. Which will be a healthy reset for tech funding.