AI Stocks: A Bubble Set to Burst?

Investors are increasingly drawn to stocks with artificial intelligence (AI) exposure, but this trend may come with a hefty price. Economist David Rosenberg, known for his contrarian views, suggests that the hype around AI is distracting investors from looming recession risks. He doesn’t mince words, stating outright, “No question that we have a price bubble.”

Rosenberg sees striking parallels between the current AI boom and the late 1990s dot-com boom, particularly in relation to the Nasdaq 100’s performance over the past six months. He describes the situation as “very weird” and “way overextended.”

This week, Nvidia’s impressive quarterly results further fueled the AI frenzy. The chipmaker raised its yearly forecast following a strong quarterly earnings beat. Nvidia CEO Jensen Huang attributed this success to soaring demand for their AI chips. Following the report, Nvidia’s stock rose by more than 24%, marking a 133% increase over the last six months. Other AI competitors, including Alphabet, Microsoft, and Palantir, are also experiencing a surge in their stock prices.

However, Rosenberg cautions that this rally is living on borrowed time. He points out that the breadth measures for the S&P 500 are the worst they’ve been since 1999, with just seven mega-cap companies accounting for 90% of this year’s price performance. He also notes that the tech weighting in the S&P 500 has risen to 27%, a level it last reached in 2000 just as the dot-com bubble was about to spectacularly burst.

While mega-cap tech stocks are outperforming, Rosenberg observes troubling trading activity in banks, consumer discretionary stocks, and transports. These sectors, which have the highest correlation to GDP, are down more than 30% from their cycle highs. According to Rosenberg, they’re following the same pattern they have in the lead-up to the past four recessions.

This analysis serves as a stark reminder for investors to exercise caution and not get swept up in the hype surrounding AI stocks. The current enthusiasm may be blinding many to the potential risks and the historical patterns that suggest a significant market correction could be on the horizon.


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