Every year, we at eToro produce an investor’s almanac full of themes we believe could revolutionize the world. AI has been a constant feature, gaining momentum year after year. Just a year ago, the AI craze was in its infancy, with groundbreaking innovations such as ChatGPT coming to the fore.

However, the landscape today is different. The once surging optimism surrounding AI has been replaced with a more cautious outlook. While AI remains a hot topic, there is now a discernible air of skepticism about its true potential.

The burden of proof

AI enjoyed a period of remarkable momentum in the first half of the previous year. Headlines touted ChatGPT’s capabilities to such a degree that it seemed ubiquitous, with claims ranging from managing finances to reading minds and even achieving world peace. This fervor also translated into substantial investment, with the AI frenzy playing a crucial role in bolstering the stock market performance in 2023, particularly the Nasdaq 100, which registered its most robust return in two decades.

However, the second half of the year witnessed a significant shift. Instances like OpenAI’s tumultuous corporate episode involving the hasty dismissal and reappointment of Sam Altman, among others, led to growing skepticism on Wall Street, with AI being branded a potential bubble rather than a true revolution. In place of the once-frequent discussions on AI’s capabilities, there was an emergence of what AI couldn’t do, highlighting its limitations.

It’s crucial to recognize that every nascent product undergoes phases of both elation and disappointment. Gartner, a prominent technology research firm, labels this stage in AI evolution as the “trough of disillusionment,” wherein people begin to question whether the technology can truly live up to the lofty expectations set for it.

Despite this, AI’s momentum continues unabated. For every negative headline, there appear to be ten lauding how AI has the potential to revolutionize our lives. However, the imperative of substantiation has grown significantly. While the wonders of AI have been widely extolled, investors are now looking for verifiable evidence of its ability to drive profits. In the stock market, companies that demonstrate such viability could spearhead the next wave of the AI trade.

Closing the gap

Nvidia was the first major company to surmount this challenge. It outperformed its revenue targets in the second and third quarters by over $2 billion each time, primarily attributed to robust GPU demand. As a result, Nvidia’s shares surged by an astounding 200% over the year. Yet, paradoxically, Nvidia’s price-sales ratio ended the year at around 14, marking an 11-month low.

Other companies have also made headlines, hinting at optimistic prospects in the AI domain. IBM experienced a four-year high in its shares on January 25, supported by reports that its generative AI business had more than doubled in the fourth quarter. Similarly, AMD indicated an expansion in the total addressable market for its AI processors to $45 billion, up from a $30 billion estimate in June.

The impact of AI is gradually coming to the fore. Nonetheless, numerous unknowns persist, and it is doubtful whether the AI trade will be as seamless this year as it was in 2023. There exists a substantial divide between the tech sector and the rest of the market following the remarkable performance of the “Magnificent Seven” in 2023. Should the economy continue to defy expectations, investors may feel emboldened to seek gains in cyclical stocks beyond tech.

Additionally, if Wall Street’s prognostications materialize and the prices of AI stocks appear excessively inflated in relation to their profits, uncovering value in the market may require a more concerted effort. This echoes what is known in investing circles as the “picks and shovels trade,” involving the identification of businesses that supply the necessary tools and infrastructure for a particular industry’s operations.