Global stock prices have fluctuated wildly over the past week as concerns about the valuation of AI have floated through stock markets. Nvidia’s earnings release on Wednesday provided some respite from a four-day slide, but the company’s own gains quickly reversed during Thursday’s trading as the New York-listed stock fell further. On Friday, while U.S. stocks returned to positive territory, Asian semiconductor stocks plummeted and European stock market declines reignited. ‘Everything is a bubble’ The possibility that the stock market is in an AI bubble has been a hot topic in recent months, with investors scrambling to see if companies can live up to the $1 trillion AI hype. But Dan Hanbury, who co-manages global strategic equity strategies at investment management firm NinetyOne, told CNBC that while the formation of an AI bubble seems to be “the ultimate problem right now,” crazy prices go far beyond the realm of artificial intelligence. “If you take a step back and look at valuations, I think it’s very difficult to argue that there isn’t a bubble in the U.S. market,” he acknowledged. But despite “many red flags” in the stock market, market participants need to take a broader view, Hanbury said. “We’ve had such incredible earnings growth and at this stage we see very little sign of them slowing down. (At the same time) interest rates and discount rates are normalizing.” “I don’t think we’re completely out of that situation yet, so I would argue that we’re a little bit in what some people call an ‘everything bubble,'” Hanbury told CNBC. “I think we’re still working out that problem and it’s impacting debt-backed products, bond markets, real estate, and how that’s reflected in equity valuations, creating bubbles in everything.” A Bank of America survey of 172 fund managers who collectively manage $475 billion worth of assets in November found that a majority believe global stock markets are currently overvalued. While other investors have voiced concerns about a potential debt crisis, the valuations of other parts of the market, such as the European Defense Bank and the World Bank, which have posted strong gains this year, have also been called into question. But many of these conversations have been overshadowed by AI trading. Mr Hanbury said it was difficult to predict what the current situation would be, with markets, governments and central banks becoming more aware of valuation concerns. “So, really, this is the case that they’re trying to solve. How do I plan on getting through this problem? And there’s a whole behavioral aspect to the market where you’re seeing fear and greed coming in, and how that impacts security prices,” he said. Oliver Jones, head of asset allocation at British asset management firm Rathbones, told CNBC he didn’t think the market was all in a bubble, but he didn’t rule out the possibility that small changes could create a bubble. “U.S. stocks, especially those of companies seen as beneficiaries of investments in tech and AI, are undoubtedly expensive by historical standards,” he said. “But unlike at the peak of dot-com mania a quarter-century ago, stocks are not uniformly expensive,” Jones said, noting that some signs related to broader speculative excess seen in the past, such as a significant increase in stock issuance and a surge in M&A activity, do not seem to be present in the U.S. or other countries. “That hasn’t happened recently,” he told CNBC. “Even taking into account AI-related activity, these actions remain restrained.” “Big bubbles are often preceded by sharp increases in aggregate investment and private debt, but again, that hasn’t happened recently.” But he cautioned that “if these conditions start to change, we should be more concerned about broader bubbles.” Toni Meadows, head of investments at BRI Wealth Management, agreed that she did not believe the market was in a so-called “everything bubble”, but said her team did not see a smooth outlook ahead. “We believe there are signs of risks to the real economy around jobs, and the eventual impact of technology will make the situation even worse at some point,” he told CNBC in an email. “But so far there are no clear signs that the economic downturn will be prolonged.” However, Meadows acknowledged there are risks that investors should consider. In the UK, for example, uncertainty is rising ahead of the crucial autumn budget. “Managing a diversified portfolio with balanced risks is probably wiser than putting in new money before the UK budget,” he said. “The extent of the unwinding only puts many of the popular tech stocks back to where they were in September. We entered this period with slightly elevated cash levels, so we feel comfortable waiting for a better entry point.” Buying Opportunity Michael Field, chief equity strategist at Morningstar, told CNBC on a conference call that while he’s not “completely ignoring the risk of a bubble,” he doesn’t believe a bubble has already formed in the market. “From our perspective, thankfully, we’re not all in a bubble,” he said. “The way to assess that is to first look at the headline numbers,” Field said during a conference call Wednesday, saying U.S. stocks are trading at a nearly 5% discount to Morningstar’s fair value estimate, while European stocks are trading at a nearly 3% discount. “I would say we have erred on the side of caution. There have been many times over the past few years where we have argued that the market is overvalued,” he added. “There are certainly red flags and some things we’re concerned about, but we’re not panicking yet about valuations or the companies themselves.” On Big Tech, Field said Tesla and Nvidia are overvalued, but Alphabet, Meta and Microsoft have further upside. European healthcare and tech stocks, including Roche, GSK and Novo Nordisk, were also trading at deep discounts, he argued, having been “punished for much of this year”.
