A Risky Bet on Alphas to Rekindle the AI Trade

Alphabet (GOOGL) breathed fresh life into the AI sector on Monday, sending its shares up 6.3% and lifting related stocks like Broadcom (AVGO), Micron Technology (MU), and AMD (AMD). The Nasdaq Composite (.IXIC) enjoyed its strongest session in half a year, fueled by renewed investor confidence in artificial intelligence’s potential.

Broadcom experienced a particularly significant boost, climbing 11.1% to become the S&P 500’s top performer. Investors are bullish on the company’s role in designing and manufacturing custom AI chips for Alphabet. This symbiotic relationship suggests that Broadcom stands to directly benefit from Alphabet’s expanding AI footprint, similar to Nvidia’s current position within the AI ecosystem. The strategic partnership underscores a growing trend of specialized hardware providers capitalizing on the burgeoning AI market.

However, the enthusiasm surrounding Alphabet’s dominance isn’t universally shared within the investment community. Some analysts express concern about the potential implications of one company wielding excessive influence in the AI landscape.

“Some investors are petrified that Alphabet will win the AI war due to huge improvements in its Gemini AI model and ongoing benefits from its custom TPU chip,” noted Ben Reitzes, analyst at Melius Research, in a client note. “GOOGL winning would actually hurt several stocks we cover – so prepare for volatility.” This sentiment reflects a broader worry that a monopolistic outcome could stifle innovation and limit opportunities for other players in the sector. The concentration of power could also lead to inflated valuations for Alphabet and its direct partners, creating a risk of a market correction if expectations aren’t met.

Melissa Brown, managing director of investment decision research at SimCorp, cautions against the market being overly reliant on a single stock’s performance saying that “That just doesn’t seem to me to be a sustainable force behind driving the market higher over the next however many days,” further highlighting the risk of relying excessively on a single company’s success.

While Alphabet’s recent surge reflects its potential to deliver market-beating returns (“alpha”), allowing it to control the future (“omega”) of AI could create imbalances and challenges for investors.

Could markets be facing an ‘everything bubble’? Investors are divided

Dan Hanbury, co-manager of the Global Strategic Equity strategy at Ninety One, suggests that concerns about a bubble aren’t limited to AI. He argues that broader market valuations, particularly in the U.S., raise red flags.

“I think if you step back and look at valuations, it’s very hard to argue there’s not a bubble in the U.S. market,” he conceded, emphasizing the need for a comprehensive assessment of market conditions and risk factors beyond the AI sector.

— Chloe Taylor