The surge in artificial intelligence (AI) stocks has captivated investors in 2024, propelling markets to new heights. However, Vanguard, the world’s second-largest asset manager, has issued a stark warning: the current frenzy over AI's potential might be overestimating its near-term impact, increasing the risk of a market correction.
Vanguard’s Cautious Outlook
Joe Davis, Vanguard’s chief economist, likened the AI investment rush to the tech boom of the 1990s. While Davis acknowledges AI's transformative potential, he cautioned that investors are pricing in a 90% probability that AI will surpass the revolutionary effects of the personal computer. According to Vanguard's analysis, the likelihood is closer to 60-65%.
“The US stock market today is pricing an extreme level of certainty in AI's impact,” Davis said. “From an economic perspective, we’re roughly in 1992. But from a market valuation perspective, I can make the argument that we’re in 1997.”
This analogy draws a clear line to the late 1990s dotcom bubble, where optimism surrounding technology culminated in a market crash.
AI Stocks Driving Market Gains
AI stocks have been key drivers of Wall Street's rally this year, with the S&P 500 up 27%. Nvidia, a leading chipmaker for AI applications, has seen its stock soar over 180%, contributing significantly to the index’s gains. Meanwhile, tech giants and private companies like OpenAI have achieved towering valuations as they expand their AI portfolios.
However, Davis warned that the companies leading the AI investment wave might not ultimately reap the long-term rewards. “The irony is that even if the technology is transformational, you can still have a correction in the prices of the very stocks that led the transformation.”
The Broader Picture: Winners Beyond Big Tech
Davis pointed out that while Big Tech has captured much of the spotlight, industries outside of technology—such as healthcare, utilities, and financial services—may become the primary beneficiaries of AI adoption. “The companies that use AI, rather than those that produce it, may deliver the most significant returns in the future,” he said.
Additionally, new entrants in the AI space could dilute returns for current leaders, further complicating the outlook for investors chasing short-term gains.
What Lies Ahead?
While Davis emphasized that predicting the timing of a market pullback is difficult, his cautionary remarks are a timely reminder of the volatility inherent in markets driven by speculative enthusiasm. As AI continues to evolve, investors must weigh long-term potential against current valuations.
Source: FT
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