AI Investment Is Booming—What Happens When It Flags?

Artificial intelligence-related stocks are the hot new thing on Wall Street. This year, shares in chip designer Nvidia, for instance, have almost tripled. The SG Rise of the Robots/AI Index, which tracks stocks in the field, has advanced 2.5 times in the same period. AI-oriented exchange-traded funds have seen investment inflows surge 30%.

But every market study shows that popular crazes will eventually peter out, even if the underlying businesses maintain their importance. Example: The mania in web stocks crashed two decades ago, but the internet is now a backbone of civilization.

Société Générale predicts the same fate will befall AI equities, but it has a strategy to avoid the worst of the coming plunge and emerge with solid holdings in the sector.

The French investment firm warns of upcoming “waves of AI regulation.” Talk is rife in Washington and in European capitals about adding rules governing AI to avoid it harming humans. Another likely problem, it admonishes: “AI-washing,” meaning stocks that seek to appear deep into artificial intelligence when they really are not, hoping to benefit from AI’s popularity.

The impact of the AI mania on the market is breathtaking, SocGen found in a research report by Manish Kabra, its head of U.S. equity strategy. If AI boom stocks were excluded, the Nasdaq Composite’s 35% rally this year would be halved, he calculated, and the S&P 500’s 14% climb would be in negative territory.

What’s the best way to invest in AI? Kabra suggested investing in a broad array of AI-linked stocks, some producing the components of the concept, such as software, and others benefiting from it, such as airlines, which can use AI to improve scheduling and route planning, among other things.

As it happens, SocGen originated the Rise of the Robots index, which it holds up as a template for AI investors. Sure, the firm is talking up its own product, but no fund provider has yet licensed it. The index holds 150 stocks, ranging from Nvidia to Delta Air Lines.

Kabra pointed out that Federal Reserve rate hikes almost always result in a recession and recommended AI as a hedge against it, apparently assuming that some of its providers will prove so vital to businesses that they will do OK in a downturn.