AI Valuation Fears Grip Investors as Tech Bubble Concerns Heighten

This week’s pullback in equity markets, particularly in U.S. artificial intelligence-related stocks, has re-ignited anxieties about valuation risks and potential contagion across global investment portfolios. The correction follows months of robust growth driven by the AI narrative, prompting investors to reassess their exposure to the sector.

Goldman Sachs CEO David Solomon recently cautioned about a potential 10-20% market drawdown within the next two years, echoing concerns voiced by the International Monetary Fund and the Bank of England regarding asset valuations and systemic risks.

Bank of England Governor Andrew Bailey, in an interview, specifically addressed the possibility of an AI bubble. He acknowledged the substantial “positive productivity contribution” from technology companies, but stressed the inherent uncertainties surrounding future revenue streams and the potentially destabilizing effects of speculative investment.

“We have to be very alert to these risks,” Bailey stated, highlighting the need for vigilance in monitoring capital flows and assessing the true economic impact of AI technologies.

The effects of the AI investment boom aren’t confined to US markets. Legrand, a French company providing infrastructure solutions for data centers, including server cooling equipment, is experiencing significant growth. The company, a supplier to tech giants like Alphabet, Amazon, and others, has witnessed its shares climb by roughly 37% this year, mirroring the gains seen by Nvidia. This demonstrates how the AI surge is creating opportunities across various sectors and geographies, extending beyond the pure-play AI developers.

Despite the burgeoning concerns, some industry leaders remain optimistic. Anders Danielsson, CEO of Swedish construction conglomerate Skanska, which is heavily involved in building data centers and other infrastructure vital for AI development, downplayed the notion of an impending slowdown.

“In the U.S. we have a very strong pipeline of data centers — we don’t see any slowdown there,” he affirmed. “We are working with large international customers and they are also interested in building data centers in central Europe, and in the Nordics and the U.K. We haven’t seen any slowdown really.” This sustained demand suggests that the underlying infrastructure build-out supporting AI remains robust, even if valuations in specific AI-related stocks are being questioned.

UBS strategist Kiran Ganesh observed the relatively low volatility considering the substantial capital deployment and remaining uncertainties around future cash flows. He noted that recent earnings season results have been better than expected and overall market sentiment remains positive.

“We’ve had a remarkably smooth rally given the scale of investment that’s taken place, given the uncertainty about future cash flows, and given some of those concerns about valuation,” Ganesh stated. “Although some volatility has been materializing this week, we think that’s to be expected and the bigger picture still remains positive.”

However, growing numbers of investors are becoming wary of perceived stretched valuations within the AI sector and wider US equity market. This is particularly visible in the movements of companies like SoftBank, which has significant investments across AI infrastructure, semiconductor, and application firms. The Japanese conglomerate experienced a sharp decline in share price, culminating in nearly $50 billion in weekly losses, suggesting a potential cooling of investor appetite for AI exposed assets.

Adding to these concerns, recent disclosures reveal that Scion Asset Management, led by Michael Burry of “The Big Short” fame, has taken short positions against Palantir Technologies and Nvidia, signaling a bearish outlook on these bellwether AI stocks. The move has elicited strong responses, including from Palantir CEO Alex Karp, reflecting the divided sentiment currently surrounding the AI market.

Glen Smith, chief investment officer at GDS Wealth Management, suggests that with the short term correction, “Some big tech stocks are on sale, and are presenting buying opportunities for investors, especially for investors who have missed out on the market’s strength over the past two months,”.

Luca Paolini, chief strategist at Pictet Asset Management, points to stretched valuations and recommends a neutral stance on U.S. equities. He favors emerging markets, citing diversified exposure across countries like India and Brazil. These emerging markets will benefit from AI-driven investment and monetary easing, according to Paolini, suggesting investors are looking for opportunities outside traditional markets.