The recent surge in stock prices of major US technology companies, driven by excitement surrounding artificial intelligence (AI), has raised concerns about the sustainability of these valuations.
A select group of companies, known as the "Magnificent 7" and including Apple, Nvidia, Microsoft, Amazon, Alphabet, Meta, and Tesla, dominate the market landscape and contribute significantly to overall valuations. José Antonio Blanco, Chief Investment Officer of Third-Party Business Switzerland and Head of Multi-Asset Management at Swiss Life Asset Managers, cautions that the influence of these companies on valuations is alarming. Without their contributions, the price-to-earnings (P/E) ratio of US large caps would only be slightly above average, suggesting that the broader market may be more reasonably valued than it appears.
While there is optimism about AI's potential to revolutionize industries, Blanco argues that it does not provide a solid foundation for justifying the high valuations of these tech stocks. The future impact of AI on corporate growth and profitability is uncertain, with varying estimates of its contribution to economic growth. Blanco highlights several hurdles that could impede the advancement of AI, including energy requirements, data needs, and rising implementation costs. These factors raise questions about the economic viability of AI applications, especially as regulatory scrutiny increases.
Blanco warns that a market correction is inevitable, as investors may no longer accept the inflated valuations of the "Magnificent 7." This correction could have widespread implications, given the US market's significant share of global market capitalization. However, the outlook for equities in 2025 remains cautiously optimistic, with attractive valuations in many segments of the market. While the current market may be overheated, there are still areas of potential growth for investors to consider.
In summary, the excitement surrounding AI has driven stock prices higher, but the sustainability of this rally is under scrutiny. Investors need to remain vigilant and discerning in their approach to equity investments as the market navigates these challenges.