As artificial intelligence (AI) dominates headlines and investment portfolios, a prominent Wall Street voice is urging caution. Jim Covello, the head of stock research at Goldman Sachs, has become one of the few dissenters in a world seemingly captivated by the promise of AI. With companies projected to spend up to US$1 trillion on AI in the coming years, Covello is questioning whether the industry’s rapid expansion can deliver the expected returns.
Covello’s scepticism is grounded in history. While driving up Highway 101 from San Jose to San Francisco, he couldn’t help but notice the overwhelming number of AI billboards. “Not that long ago, they were all crypto,” Covello remarked, pointing to a pattern of speculative frenzy.
Three months ago, Covello shook the market with a research paper that challenged the sustainability of AI investments. His main argument? The AI technologies currently in development, such as generative AI, make too many errors to reliably solve complex problems. “Overbuilding things the world doesn’t have use for, or is not ready for, typically ends badly,” Covello warned.
This scepticism came at a critical time, following a blog post by a Sequoia Capital partner that raised similar concerns. The stock market reacted swiftly, with Goldman’s basket of AI-related stocks—including giants like Nvidia, Microsoft, and Meta—falling 7% from its July 10 peak.
The tech industry has seen its share of booms and busts, from the dotcom era to the rise of cryptocurrencies. Covello’s scepticism is rooted in these experiences. As a semiconductor analyst during the dotcom bubble, he witnessed the chaos that ensued when the bubble burst. Now, with AI, he’s cautious. “It was a very scary time,” he recalled about the dotcom crash. “I didn’t know if I was going to have a job.”
Goldman Sachs itself is split on the issue. George Lee, co-head of the firm’s geopolitical advisory business, remains optimistic about AI. He believes that while the technology is still evolving, it has the potential to save time and improve productivity. “The long-term impact of platform shifts is that applications emerge over time as that technology is refined,” Lee said.
Goldman’s clients have taken notice. Jim Morrow, CEO of the Boston-based Callodine Group, noted that Covello’s warnings prompted many to reconsider their AI investments. “Having someone from a firm like Goldman ring the bell and say, ‘Hey, it won’t become a reality the way everyone thinks’ had people asking important questions,” Morrow said.
Covello’s scepticism hasn’t gone unnoticed within Goldman either. After the release of ChatGPT in 2022, Covello joined an internal team to evaluate AI services for the firm. His findings were not promising. He found the AI tools costly, cumbersome, and ultimately not “smart enough to make employees smarter.” One AI service he tested saved analysts 20 minutes per company in updating financial results but cost six times more than traditional methods.
His concerns were captured in a widely read report titled “Gen AI: Too Much Spend, Too Little Benefit?”, in which he questioned whether the costs of AI would decline, noting that prices for sophisticated technologies, like semiconductor manufacturing machines, have actually risen.
At a recent Goldman tech conference, Covello and Lee squared off in a public debate over the future of AI. Covello pointed to failures like a pharmaceutical company abandoning its AI services, while Lee cited a Princeton University study showing that AI had increased productivity by 20% among developers. “It’s not perfect,” Lee admitted, “but people are picking up dimes of productivity savings.”
Despite the bullishness of others, Covello remains cautious. He predicts the AI boom will lose steam once companies scale back spending in response to dipping profits. However, he doesn’t foresee an AI-triggered recession similar to the dotcom crash. Still, Covello is far from complacent. “When you have a view that’s sort of out on a limb, you live in this kind of constant state of paranoia that AI is going to be as big as everybody thinks it is,” he confessed. “So I am genuinely on the lookout every single day for my blind spots. Where could I be wrong?”
