The AI report triggering panic and fear on Wall Street

Sam Altman thinks AI investors are ‘overexcited’ - Mark Schiefelbein/AP

“When will the internet bubble burst?” the cover story of Barron’s asked on March 20 2000. “That unpleasant popping sound is likely to be heard before the end of this year.”

In fact, that same day, one of the most high-profile tech businesses of the moment suffered a share price plunge of 60pc. A flood of other collapses followed, evaporating trillions of dollars.

Now, some on Wall Street fear that “unpleasant popping sound” may be imminent for the artificial intelligence (AI) boom.

On Tuesday, tech stocks suffered a shock sell-off after a report from Massachusetts Institute of Technology (MIT) researchers warned that the vast majority of AI investments were yielding “zero return” for businesses.

“Despite $30-40bn (£22-30bn) in enterprise investment into Gen[erative]AI, this report uncovers a surprising result in that 95pc of organisations are getting zero return,” MIT academics wrote.

Shares in Nvidia – the $4tn company that has powered the AI boom – dropped by 3.5pc, while data giant Palantir fell by 9pc.

MIT’s findings threaten to be the pin that pops the tech stock market bubble, which has added trillions of dollars to the value of US stocks.

Since the launch of ChatGPT in 2022, Silicon Valley has been evangelical that AI chatbots will transform the economy. Executives have spent billions on tools for their staff as a result and predicted massive cost-savings.

But the promised AI revolution has stalled, MIT’s report suggested.

After surveying 150 business leaders and 350 employees, MIT found that “just 5pc of integrated AI pilots are extracting millions in value, while the vast majority remain stuck with no measurable P&L [profit and loss] impact”.

“Sounds about right for a bubble,” said Marko Kolanovic, former head of research at JP Morgan.

MIT also found that despite widespread investment in AI software, half of projects ended in failure. It said 80pc of companies had explored AI technology but just 40pc deployed it.

It added that “enterprise grade systems” were being “quietly rejected” by major businesses and only “20pc reached pilot stage and just 5pc reached production”.

The report, from the US university’s Nanda AI project, went on to argue that many employees in fact want to use AI but are turning to consumer products such as ChatGPT on their own dime, rather than relying on expensive or unwieldy corporate AI tools.

The report insisted that “AI is already transforming work, just not through official channels” – but its headline finding that nearly all investment by businesses is going to waste could not have landed at a more delicate moment.

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Despite being one of the biggest beneficiaries of the AI boom – with investors reportedly exploring a $500bn valuation for his start-up OpenAI – Sam Altman last weekend refused to dismiss concerns that tech stocks are in a bubble.

“Are investors overexcited? My opinion is yes,” the ChatGPT chief executive told reporters at a private dinner, adding that some people stood to lose a “phenomenal amount of money”.

Investors fear that one of those losers could be SoftBank, the Japanese tech giant that has invested billions in OpenAI. Its shares fell by 7pc on Tuesday.

Days earlier, OpenAI underwhelmed observers with the launch of its much-hyped ChatGPT-5 model. Many users were disappointed and urged the company to bring back its earlier technology. The gains of the new chatbot have been, in the opinion of many users, incremental at best.

The stakes in all of this are incredibly high. Morgan Stanley has predicted that data centre investment will reach $3tn over the next three years, heavily fuelled by debt. Almost all of that capacity is intended to fuel an expected surge in AI use.

Another prediction from the bank this week argued that AI would add $16tn to the S&P 500 thanks to a 40pc saving in salary costs driven by job cuts and efficiencies. If MIT’s report is correct, such savings may be unrealistic.

In a sign that even true believers think the AI market may be out over its skis, Meta this week announced a reorganisation of its AI division that will see it downsize its headcount, the New York Times reported.

Mark Zuckerberg, the company’s founder, has been one of the splashiest spenders in the market to date, throwing hundreds of millions of dollars at AI engineers in an effort to lure them to Meta.

Despite the jitters, this week’s sell-off has yet to shift from a market correction to a market rout. Some believe it is merely a speed bump.

Dan Ives, a technology analyst at Wedbush Securities, said in a note: “Skeptics of tech rally will be proven wrong (again).”

Next week, Nvidia – the world’s largest company by valuation – will report its results and could shed light on the state of AI investment by some of the world’s biggest companies. Its profits and revenues have beat Wall Street forecasts nearly every quarter over the last two years.

“In our view the tech bull cycle will be well intact at least for another two to three years,” Ives said.

Still, ears are now straining for the ominous sound of a pop.

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