What to Know About Artificial Intelligence (AI)

As artificial intelligence (AI) promises to fundamentally alter nearly every aspect of our lives, companies are investing tens of billions of dollars in anticipation of future profits. But the scope of AI's impact remains somewhat uncertain, given complex technical, regulatory, and societal factors.

We talked to Kevin Gordon, senior investment strategist at Schwab, and Mark Esposito a professor of economics with appointments at the Hult Futures Lab and Harvard University and a member of the World Economic Forum's Global AI Alliance, about where AI stands today and how investors can potentially take advantage of it.

Mark: AI has demonstrated some pretty impressive feats across various fields. Natural language models like ChatGPT, for instance, can create and summarize content. Computer vision, in which machines are taught to see and understand visual data, is helping to automate driving and diagnose diseases. And in many cases, AI has already surpassed its human counterparts when it comes to tackling complex puzzles like financial modeling, resource allocation, and scheduling.

Kevin: The AI craze really took off in early 2023 as big tech companies invested billions in a kind of arms race—but we saw a sell-off soon after as investors worried that these unprecedented investments might not translate to financial returns for the foreseeable future.

However, it's a mistake to think that direct investment in tech stocks is the only way to participate in AI's potential. Over time, AI could contribute to the whole economy, not just the technology sector, as it extends its reach into enhancing human capability and supercharging productivity.

For example, if our aging workforce leads to significant labor shortages, AI could help fill that gap by boosting output per worker. What's more, low-margin industries such as airlines and supermarkets could take a more measured approach to hiring if AI could help existing employees do their jobs more efficiently.

Mark: In health care, AI is on track to transform diagnostics, drug discovery, and personalized treatment. With respect to climate change, AI could optimize energy systems and anticipate—maybe even mitigate—natural disasters. In education, AI may be able to identify where students struggle and offer customized support, making education more effective and inclusive. Of course, maximizing AI's potential requires strong frameworks that ensure these technologies are used ethically and responsibly.

Kevin: Absolutely. The utilities sector, for example, has soared thanks to the increased demand from AI,¹ which requires exponentially more power than previous technologies. The seemingly unquenchable thirst for new data centers and other AI infrastructure has also benefited other sectors, including energy, industrials, and materials.

Mark: It's easy to get swept up in the buzz surrounding AI, but it's important to set realistic expectations when it comes to its current capabilities and limitations. For example, while generative AI chatbots like ChatGPT have caused a lot of excitement, they still have some hurdles to clear, especially when it comes to making sure information is accurate and coherent.

Kevin: It's hard to pick winners or get the timing right for any new technology. In general, investors can look for companies that provide critical components—both hardware and software—to AI providers. In the near term, these supporting players may prove less volatile than the big providers themselves—particularly as the Federal Trade Commission investigates whether AI models violate consumer protection laws. On the flip side, be on guard against poorly performing companies that suddenly trumpet plans to roll out AI products, which can be a thinly veiled attempt to distract from underlying weaknesses in other areas.