Confidence in AI's capacity to increase future profits has pushed Nasdaq composite indices up 38% since the beginning of the year. On Thursday, Nvidia closed out the day with stocks up 190%, while Meta Platforms and Tesla both gained 154% and 99%, respectively. Morningstar compared this concentration of high valuations to the dotcom bubble of 1999, though Coop noted the variance in the current rally is that the companies at the core of it are "well-established titans with substantial competitive advantages."
According to Mike Coop, CIO at Morningstar Investment Management, participants in the market are overly confident in their capacity to anticipate the long-term implications of AI. Despite some losses this month, the anticipation of AI spurring future profits has enabled the tech-oriented Nasdaq composite to surge by more than 38% since the beginning of the year, while the S&P 500 has grown more than 16%. Some analysts have proposed that a market bubble may be forming due to the concentration of gains within a select few tech stocks. As an example, Nvidia stocks ended the Thursday trading session up 190% from the start of the year, while Facebook parent Meta Platforms has risen over 154%, and Tesla has added 99%. Coop noted to CNBC's Squawk Box Europe on Friday that the surge could be linked to the release of ChatGPT in November, announcements of substantial investment in AI by major companies, and a broader recognition of accelerated generative AI.
In his research note, Morningstar's Coop drew a comparison between the concentration of large valuations currently and the dotcom bubble of 1999. He distinguished the current rally from the previous one by noting that the companies at the center of it all tend to be "established giants with major competitive advantages." He added, though, that "the prices have run so hard that it looks to us that really people are overconfident about their ability to forecast how AI will impact things." In reference to major technological shifts such as electricity, steam and internal combustion engines, computing and the internet, Coop asserted that it is impossible to predict where the long-run effects will lead. He said that this has caused the U.S. market to be concentrated around a similar theme, leading to "overconfidence" from investors. He urged investors to remain "valuation aware," diversify their portfolios, and look for stocks which are "pricing in a bad case scenario" while bonds are offering better value than 18 months ago. He concluded his note with a warning: "Be cognizant of just how high a price is being paid for the promise of what AI may or may not deliver for individual companies."
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