The artificial intelligence (AI) stocks that have been setting the pace in U.S. equities this year may be seeing their heyday nearing an end.
A recent report from Morgan Stanley cautions that the bubble surrounding AI-centric stocks is nearing its peak. Their strategists pointed to NVIDIA, an AI bellwether, which has surged by over 200% since the beginning of the year.
Using historical data as a reference, Morgan Stanley strategists predict that this current stock market rally may be nearing its final phase. Past trends show that in the three years leading up to their peaks, U.S. stock bubbles typically experience a median gain of 154%.
Undoubtedly, as the reigning king of AI GPUs, NVIDIA has earned the title of the "sole arms dealer" in the AI battle, a distinction granted by Wall Street institutions. Reflecting the fervor for AI, NVIDIA's stock has soared by over 200% since the start of the year. By the end of May, it had surpassed a market capitalization of $1 trillion, becoming the first chip stock globally to achieve this milestone.
However, Morgan Stanley emphasized that broader AI indices have seen much modest gains compared to NVIDIA's meteoric rise. For instance, the MSCI USA IMI Robotics & AI Select Net USD Index has risen by about 47% this year.
Given the lack of uniform characteristics across the AI sector, Morgan Stanley believes that to draw accurate or fair conclusions about the bubble's ascent or descent, one should look at the situation from an index-level perspective.
It's worth noting that more than once this year, the narrative on Wall Street has been that the U.S. stock market's gains have been largely driven by AI, with bullish bets on blue-chip tech stocks being the most crowded trades. In the same month that NVIDIA was receiving its accolades, Michael Hartnett, a strategist at Bank of America and one of the most accurate analysts on Wall Street in the past year, warned in a report that valuations for tech and AI stocks were soaring, entering the "infancy" of a bubble. He also suggested that the Federal Reserve's rate-hiking cycle might not be over, signaling that it might be time to sell.
Last month, debates emerged among analysts over whether the current AI frenzy was reminiscent of the late 1990s internet bubble.
Optimistic analysts believe that this time is different, with AI companies at the forefront of technologies that will reshape society in the coming years. While the valuation of tech stocks is indeed a concern, they argue that AI is propelling the tech sector into a "1995 moment", anticipating growth that hasn't been seen since the 1990s.
Skeptics, on the other hand, feel that the current market enthusiasm is rife with speculation and overblown hopes. They warn that the surge in tech stocks is just a bubble. Previous tech stock boom-bust cycles indicate that in the long run, pinpointing the few companies that might ultimately dominate a particular sector is much harder than it seems.
