despite a recent dip in semiconductor stock performance,optimism remains high among many investors regarding the long-term potential of artificial intelligence. Fueling this sentiment are continued ample investments in AI and its rapidly expanding adoption across various sectors. However, caution is also being urged, with some analysts pointing to early warning signs mirroring past market bubbles and questioning current valuations, especially ahead of key earnings reports like Nvidia‘s this week.This report examines diverging perspectives on the AI surge and what investors are watching as the sector navigates a critical juncture.
Despite concerns about a potential bubble, global stock gains in artificial intelligence (AI) related companies are likely to continue, fueled by ambitious spending plans and rapid user adoption, according to Fidelity International.
Joseph Chan, Portfolio Manager at Fidelity International, believes the recent pullback in global semiconductor stocks – prior to Nvidia’s earnings announcement this week – is likely temporary.
Unless capital expenditure in AI slows or usage declines, he anticipates a rebound following this corrective move, Chan said.
AI Stock Surge
“We are still in the early stages of the upswing,” said Chan, who helps manage over $10 billion in assets at Fidelity. “It would be a mistake to get out of AI stocks too early.”
This optimistic outlook is shared by a number of investors, even as concerns about inflated valuations have led to declines in some of the most prominent AI stocks. Many believe the current boom represents a generational technological shift, making it difficult to dismiss as a fleeting market trend. The involvement of prominent figures like Jeff Bezos in new AI ventures further supports this view.
AI’s Potential
Hartwig Kos, Head of Multi-Asset Growth at Allianz Global Investors, agrees. He notes that a limited understanding of AI’s potential exists, and investors have yet to fully grasp its capabilities, adding, “It is too early to call it a bubble.”
For those skeptical of an AI bubble, there haven’t been clear indicators of a slowdown, such as a decline in capital expenditure, reduced usage rates, or a technological breakthrough that diminishes the need for data centers and chips.
Companies linked to AI continue to report earnings growth, and memory chip prices remain on an upward trajectory. Chan at Fidelity argues that criticisms of “circular investing” among AI companies overlook the collaborative nature of building a new ecosystem. “In the medium term, we are very optimistic about the market cycles in the technology and AI sectors,” he stated.
However, increasing stock losses are putting this optimism to the test. After six months of gains, U.S.-listed semiconductor companies experienced profit-taking in November. A U.S. chip index is down 9.4% this month, heading for its worst performance since March, while a Bloomberg gauge of its Asian counterparts has fallen by more than 7%.
Mark Bolton, Chief Portfolio Strategist at Pictet Asset Management, cautioned, “I think we’ve gotten overly enthusiastic about AI. We’re likely to be disappointed, and we’ll need to reset expectations when the time comes.”
Another Pictet manager, Yong Jai Lee, said his previous enthusiasm for Asian semiconductor stocks has waned. “We had very large positions. At the time, I saw an upside opportunity of over 50% for all those large AI chip stocks. Now, our team’s conviction in AI can’t be as strong as it was, because the upside opportunities are smaller for the same stocks.”
Hedging Against the Bubble
Early warning signs reminiscent of the dot-com bubble are emerging, but maintaining a positive outlook on AI requires navigating these cautionary signals. The “Magnificent Seven” – including tech giants like Nvidia, Microsoft, and Apple – account for a significant portion of the gains in the S&P 500. As of earlier this month, Nvidia’s market capitalization alone exceeded the combined value of all stock markets in Italy, Spain, the UAE, and the Netherlands.
In Asia, investing in the sector may require a greater belief in the technology to offset regional economic challenges, including trade tensions and a weakening Chinese economy.
Chan believes some of the recent sell-off is due to hedging ahead of Nvidia’s results. Investors likely purchased put options for protection, which may have put pressure on the market.
“If Nvidia’s results are strong, investors will ‘close out their hedge positions, and the market is likely to bounce back’,” he said.
The leading global AI company is currently trading at a forward price-to-earnings multiple of 29 times. However, this valuation appears “reasonable” given the strong growth, while key suppliers in Asia – such as Taiwan Semiconductor Manufacturing and Samsung Electronics – remain cheaper, according to Chan.
Chan concluded, “As long as the fundamentals are strong, some corrective moves due to liquidity are usually buying opportunities.”
