Preface

The discourse surrounding the AI bubble has enforced its presence in market discussions, attributed to skyrocketing AI investments and uncertain returns. The potential directions for AI over the next 12 months have captured attention, with Citic Securities pondering on the impacts propelled by algorithmic advances, business strategies of core companies, and macroeconomic liquidity.

Lazy bag

Critical considerations revolve around the viability of AI investments and the evolving landscape of core algorithms and economic impacts.

Main Body

The potential directions for the AI industry within the next year have become an unavoidable discussion, spurred by the continuous investment in AI with returns remaining ambiguous. The deliberations draw from potential advancements in algorithms, strategies adopted by key companies, and the macroeconomic liquidity factors. Over the upcoming 12 months, three likely scenarios emerge: a substantive breakthrough in AI algorithms, OpenAI encountering operational crises, or a resurgence of US inflation leading to the bursting of what could be termed the AI bubble.

The most likely scenario according to Citic Securities, with a 60% probability, involves OpenAI encountering operational crises. OpenAI’s pivotal role in driving the current GenAI wave is acknowledged, albeit amidst challenges from competitive forces like Google's advanced AGI capabilities. The predicament OpenAI faces could potentially impact revenue streams and its foundational standing in the market.

Algorithmic breakthroughs marginally hold a 20% probability. Despite recent industry developments, immediate substantive breakthroughs in AI algorithms remain unlikely. The focus is on fundamentally new pathways outside current technological frameworks, with considerations beyond present capabilities. AI applications, although already in significant usage, remain confined to areas like coding and customer service.

The least favorable scenario, also holding a 20% probability, involves a shift towards inflation spikes in the US, potentially bursting the AI bubble. The trajectory of AI capital expenditures, with the consequential resource diversion from other economic areas, lends structural inflation risk. Upcoming political influences and economic conditions suggest potential shifts in fiscal and monetary policies, poised to create an unexpected inflow of inflation pressure by the latter half of 2026.

Considering these scenarios, and given the opaque conditions surrounding short-term AI technological progress and macroeconomic forecasts, Citic Securities advises investors to maintain a cautious and diversified approach. Incremental reallocation towards application sectors like the internet and software is deemed wise amidst ongoing uncertainties.

Key Insights Table