The Second Coming of the Machine Age

» Posted by on Aug 22, 2019 in Announcements, Shop Talk, Uncategorized | 0 comments

The “Second Machine Age” is Just Getting Started: What We Believe Investors Need to Know

There was once a time when the acronym CIO was used only at Asset Management firms, referring to the company’s Chief Investment Officer. The Chief Investment Officer is generally the person in charge of all investment decision-making for a firm’s funds and strategies.

Things have changed. These days, CIO primarily refers to a company’s Chief Information Officer, or in some cases, the Chief Innovation Officer – underscoring the undeniable impact that technology is having on the modern economy.

Technology companies have become dominant contributors to growth and employment in America over the last decade. There are start-ups and mid-sized companies, but then you also have Microsoft, Apple, Google, Amazon, and Facebook comprising about 50% of the entire technology sector’s market capitalization (these five companies also currently make up about a quarter of the entire U.S. stock market).1

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Employment in information technology and computer software is projected to grow 13% from 2016 to 2026, which is faster than the average across all other occupations in the U.S. economy. Indeed, tell your kids and grandkids that the attractive jobs of the future will almost certainly be in cloud computing, A.I. and machine learning, collecting and storing big data, and information security.3

These trends in technology and labor all point to the beginnings of what is being deemed the “Second Machine Age.” And it’s just getting started.

Morgan Stanley recently published research showing different types of technology and their relative stages of penetration, i.e., how broadly they are currently being adopted and used in the economy. For instance, from the time Apple introduced the iPhone in 2007, smartphone penetration went from zero to now reaching 73% – representing rapid-fire growth and adoption.4

We believe most analysts and established investors in tech would tell you that a tipping point for runaway growth in a new technology (which can also lead to rapid growth in valuations) happens when a technology reaches 20% global penetration. As you can see in the chart below, eCommerce penetration of retail sales and Artificial Intelligence (AI) and Machine Learning (ML) have yet to reach 20%.4 The Second Machine Age is poised to take off when they do.

Morgan Stanley research notes that many manufacturing companies already use robotics and other forms of technology-driven automation in their production process. But where the Second Machine Age can be a potentially disruptive force is when a majority of companies use Artificial Intelligence and Machine Learning “to leverage foundational technology like sensors to automate decision-making and create a continuous feedback loop that improves quality and efficiency.”

There are other data points that underscore the Second Machine Age’s nascent stage. According to Morgan Stanley, “50% of CIOs are running proof of concepts around Artificial Intelligence and Machine Learning (AI/ML), but only 8% are currently deploying the technology.” This gap represents the same kind of gap that smartphones had back in 2010, when only a small percentage of the population was using them. Think about how far smartphones have come over that decade. Today, you would be hard-pressed to find someone who doesn’t have a smartphone.4

Investor takeaway: We could be witnessing a very similar ‘early phase of adoption’ for AI and machine learning. What happens when corporate deployment reaches 20% penetration?

Bottom Line for Investors

For investors concerned over recent volatility and the possibility of recession, consider this argument: The technologies that will drive future growth are not even close to being adopted on a mass level. Smartphones only took a decade to essentially become omnipotent in the U.S. economy, and there’s a solid argument that AI and machine learning will be to corporations what smartphones were and are to U.S. consumers. We would argue that even if a recession hits in the next year, the long-term outlook for growth and advancement in the U.S. economy is still running strong.

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