What a difference a year can make. Wind the clock back. At the start of 2023 and almost every Board was pressuring its CEO to find ways to adopt generative AI as quickly as possible. Listen to corporate earnings calls and the term is still being bandied around by executives with regularity. 179 S&P 500 Index companies talked about the technology in the recent Q4 reporting season, down just slightly from the peak of 181 recorded in Q2 2023. On the ground, however, the reality is very different.

Businesses may talk about the transformational benefits of AI, but the extent to which they are using it seems very different. Generative AI models still have an unfortunate ability to hallucinate. Trust is therefore needed that tools don’t simply make things up. Data also need to be trained with significant guardrails in place. Only 5% of American firms of all sizes say they are using AI at present, while merely a further 7% say they plan on adopting it within six months, per the US Census Bureau.

Every major technology goes through a cycle. Might we be at the peak of inflated expectations for AI? If history is any guide, then a trough of disillusionment may follow. Some leading AI start-ups have already fallen by the wayside. Inflection AI’s leadership has moved to Microsoft. Stability AI has seen its CEO and co-founder resign. When Boston Consulting Group recently asked executives about prospects for AI, a majority said it would take at least two years to move beyond the hype.

Of course, it’s important to look beyond. After the trough comes a slope of enlightenment. Falling computing costs and more training will make generative AI solutions better. After an infrastructure layer – what NVIDIA is effectively selling today – a more practical application layer should follow.

Two recent books we read also provide a useful reminder of how we should consider the technology. What is Chat-GPT Doing by Stephen Wolfram demonstrates to readers just how complicated it is to create a neural data network analogous to a human brain. There is no overnight quick fix. Meanwhile, Digital Transformation by Thomas Siebel makes the valid point that AI should be thought of as part of an entirely new technology stock. Only when combined with elastic cloud computing, big data and an Internet of Things can AI reach its full potential.

*With apologies to Sigmund Freud. His famous work, Civilisation and Its Discontents explores the clash between the desire for individuality and the expectations of society.

9 April 2024

The above does not constitute investment advice and is the sole opinion of the author at the time of publication. Past performance is no guide to future performance and the value of investments and income from them can fall as well as rise.

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Alex Gunz, Fund Manager

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