A Deserving Valuation of A.I.              

                                                         8/22/26

 

Will the massive investment of the top 9 U.S. A.I. companies pay off? What deserving valuation will Wall Street ultimately assign?

An 8/16/26 WSJ article writes:

“America’s blue-chip tech companies are placing these huge bets ($3.60 trillion both on and off balance sheet financing in 2026 and the next several years: 11.7% of 2025 U.S. GDP) based on the assumptions about what the demand for AI computing – and availability of AI hardware-will be in several years. Their hope is that they will easily meet all their obligations with future revenue as consumers and businesses adopt AI in every facet of American life. If these assumptions about technology and demand prove wrong, these deals to clinch future capacity could become a monstrous burden for the tech companies and their investors.” (through added depreciation or chargeoffs)

The future of A.I. will severely impact both NASDAQ and S&P 500 values, so we think it is a very good idea to look what happened to market overvaluation in the past and how that is relevant to A.I. in the future. We document the Internet and Sub-Prime mortgage market crashes, to assess where the present stock market enthusiasms are the same, but also where they are different.

We are interested in comparing the present valuation of the S&P 500 with market peaks on:

S&P500-3/24/2000 – 1527 - CAPE 44.2

S&P500 – 10/9/2007 – 1565 – CAPE 27.2, with a level around 17, the long-term average.

S&P500 – 8/18/2026 -7691 – CAPE 42.0

You didn’t want to be in the S&P 500 at the first market peak, for it would take more than 7 years for the index to recover, but dividends did help. The present level of stock market overvaluation relative to the equilibrium Gordon model now almost reaches the level on 3/24/2000.

The present excessive market valuation had three main causes:

1)    Very low long-term interest rates. (obviously now in the past)

2)    The invention of generative A.I.  (now requiring the A.I. be quickly wide-spread)

3)    Increasing corporate profit margins.

These three factors, the first two taken successively, account for those on Wall Street that have never seen a bear market. In addition, the investment horizons on the Street are very short.

But what about the future of A.I.? Ashutosh Padhi is an A.I. consultant at McKinsey. He notes that A.I. is a general purpose technology like electricity, computers, and the Internet. Technology transformation takes years, but economic transformation, to embed the technology, takes decades. The change, so far, is broad but shallow. One billion consumers have adopted A.I. in three years, but only 6% of all surveyed companies have found that A.I. had made a meaningful difference. A figure around 5% has been found by U.S. government survey as well. The best use of A.I., as we have chronicled, has been applications at the departmental level.

The eventual best use of the A.I. is not just a focus on productivity and automation, but on growth. The emphasis should not be on faster models, but on A.I.’s human effects. To put this another way: the emphasis should not be, by necessity, partially FAIR data, but on good company leadership that can exercise good judgement and can earn the trust from customers and employees.

This suggests that Wall Street has been carried away by A.I. and that a more sober analysis of A.I. would be:

From a 4/16/26 (b) analysis:

 

                                 12/31/25    6/30/26          Calculation                      8/18/26

S&P 500                      6846         7499                                                       7691

With 30% A.I.             4264         4360         1.263 x the below                  4408

A.I. with 2%                3376         3452         +38 S&P points/quarter         3490 (A.I. with

 Economic Growth *                                                                                    2% Economic

                                                                                                                      Growth)-3614

                                                                                                                     (previous drops)

 

Given my risk preferences and portfolio structure, assuming A.I. with an economic growth around 2%, I would probably start purchasing the S&P 500 around 3490-3614, leaving 10-20% of the portfolio in cash which will probably earn a decent return. I choose to lower my portfolio risk because the above does not include the effects of climate change and lower crop yields, which will occur.

A graph of the S&P 500 in 2000 and 2007 shows that past large market slides did not result in an immediate bottom; slides occurred over an average of 2.0 years. We assume a slide equal to the average of 53%. An A.I. slide could be faster and more extreme. It then takes many years for the S&P 500 to assume a previous peak.

 

* Our S&P 500 model is within 7% of the Gordon Model, and we can use both interchangeably for the period 2015-2025 to judge a market peak. But not beyond, because Gemini then assumes massive earnings improvements due to A.I..

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You don’t believe us? Read what Bill Dudley, former president of the Federal Reserve Bank of New York has to say. When considering investments, you should consult a number of credible sources and then make up your own mind. That is the ultimate goal of our website, to create better investors.