Investors have long been infatuated with U.S. tech stocks, an infatuation that stretches back to the boom and bust cycle of the late 90s and early 2000s and right up to the current AI-driven stock rally. However, as with many love affairs, there is a risk that this one could end in heartache. The rapid rise of artificial intelligence has thrust the U.S. tech industry into a bubble, and Silicon Valley could be edging towards another crash, warns BCA Research chief strategist Dhaval Joshi.
Are We in an AI Bubble?
“We are in an AI bubble,” warns Joshi. “We’ve been wowed by some of the results.” Few stocks have stirred up as much excitement as the $1.7 trillion AI chip giant Nvidia. The company recently reported revenues of $22.1 billion during the last quarter, surpassing forecasts of $20.6 billion. Revenues for the company’s data center chips, which are used in AI models and generative AI applications, reached $18.4 billion, up 27% from the third quarter and a staggering 409% compared to last year.
These impressive numbers, however, could be a sign of a looming issue. The tech sector is currently trading at a 75% premium to the global stock market, according to Joshi’s calculations. This scorching-hot growth has been the backbone of the U.S. stock market’s growth and has propelled the Nasdaq to near-record highs. In 2023, a group of companies referred to as the ‘Magnificent Seven’, which include Nvidia, Apple, Microsoft, Alphabet, Meta, Amazon, and Tesla, contributed two-thirds of the S&P 500’s total market gains.
The Unsustainable Growth of Tech Stocks
While these gains have been lucrative for savvy investors, they are unsustainable, cautions Joshi. The market sets lofty expectations and if these major tech companies fail to meet them, it could lead to a ripple effect resulting in a downturn for the entire sector. Joshi believes the market is overestimating the potential productivity growth from AI. If the innovations fail to meet these high expectations, the market will inevitably punish the companies that made them.
“Because these handful of stocks have become such a massive percentage of the market cap, any disappointment there is mathematically going to have an impact on the overall index,” Joshi warns.
Regulation of Big Tech and AI
There’s also the issue of regulation. In Europe, the EU has already passed several landmark pieces of legislation meant to break up some of the power tech giants like Apple and Alphabet already had on the market. Meanwhile, in the U.S., despite there being no national privacy law, there is an unprecedented level of bipartisan and public support for new laws that would limit the amount and type of data that tech companies can collect on users.
Moving forward, Joshi advises investors to diversify their portfolios and invest in other sectors like healthcare and luxury goods. The debate on whether or not the market is in the midst of an AI bubble is far from settled. Yet, it is clear that the tech sector is facing new challenges that will test its resilience and the endurance of its love affair with investors.
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