Those profits might be much lower in the future than bulls expect, however, writes Louis-Vincent Gave, CEO of Gavekal.

Investors, Gave argues, are falsely viewing the AI trade through the lens of the smartphone revolution—and the extraordinary profits that Apple enjoyed from it.

In reality, AI development is more capital intensive, suggesting “the future profitability of AI products may be nowhere near as high as the profitability that a company like Apple enjoyed through the smartphone rollout boom,” he writes.

“It is absolutely not a given that the AI profits will be captured by a handful of companies. Instead, the profits (assuming there are any!) will likely be diffused among many companies, and even countries.”

To Gave’s last point, China is much more important in AI than it was in the early days of the smartphone. China simply wasn’t a global tech player the way it is today, meaning it’s a mistake to think that Chinese products can’t move the needle.

Big Tech companies in the U.S. have been pushing their closed-system AI, but—as markets painfully learned at the start of the year with DeepSeek’s advances—China’s open-source AI can’t be ignored.

At the moment, it’s unclear which model will ultimately dominate, but the high valuations of U.S. AI stocks implies that it’s a given that they will carry the day.

“Gavekal never tires of pointing out, ‘when China enters a room, profits walk out.’” Gave writes. “Essentially, the valuation of a lot of AI-related names listed in the U.S. implies that China will faceplant on its AI hopes and aspirations. This may be the right bet, but is it a 100% bet?”

If it isn’t, those valuations could come down swiftly. And the stakes get higher the more money that big tech players like Facebook parent Meta, Google parent Alphabet, and Oracle pour into AI—even taking on debt to do so.

That in turn becomes a problem for everyone given that the Magnificent Seven stocks—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla—account for roughly 35% of the S&P 500.

“Putting all this together, the obvious question every investor should ponder is whether the capital allocators currently pouring billions of U.S. dollars into AI producers are looking at the road ahead, or simply fixating on the rearview mirror, reminiscing about the enormous profits generated by the smartphone revolution, and hoping furiously that AI will be a similar ecosystem,” Gave concludes.

“Unfortunately, it won’t.”