The AI industry's profit problem is getting bigger, says Goldman Sachs' equity research chief

The rapid advancement and substantial investment in artificial intelligence have raised concerns about the industry's profitability, according to Jim Covello, head of global equity research at Goldman Sachs. In a recent episode of the "Exchanges" podcast, Covello remarked that the business case for AI remains unproven, stating, "We've gotten further away from that over the last couple of years instead of closer to it." As companies continue to funnel hundreds of billions into AI technology, the necessary profit to justify these expenditures is simultaneously rising. Covello's observations come at a time when the S&P 500 is reaching new highs, yet investors are still questioning if the returns on these AI investments will be sufficient. He noted that while several developments have surpassed expectations—such as stronger-than-anticipated consumer adoption and rapid advancements in AI models—the uncertainty remains about whether these investments will yield the expected financial returns. Covello pointed out that the economic value has largely shifted towards semiconductor companies, which are enjoying significant profits. This marks a departure from previous technology cycles, where chipmakers thrived alongside their clients. Major cloud service providers are significantly increasing their AI-related capital expenditures, yet questions linger about when these investments will start to pay off. Covello highlighted a troubling trend: companies are currently losing more money implementing AI technology than they did two years ago. This, he attributes to a widespread fear of missing out. "There is a tremendous amount of FOMO at every level of the supply chain," he explained, indicating that spending is outpacing proven returns. The overarching question remains whether the substantial investments in AI will eventually lead to meaningful profits. As Covello succinctly put it, "At some point, you got to make money. You make investments in a business so that you can generate returns and make money."