Key Takeaways
- Institutional investors at Fidelity International and Allianz Global Investors believe the current AI-driven stock rally has further room to grow, countering fears of an overvalued market.
- Despite some investors withdrawing due to bubble concerns, prominent fund managers see AI as a significant technological revolution, not a fleeting trend.
- Joseph Zhang from Fidelity highlighted the absence of direct indicators of an AI slowdown, such as decreased usage or capital spending, suggesting recent market dips are temporary.
- Nvidia’s upcoming earnings report is noted as a critical factor, with potential for a market rebound if results are strong, although current valuations are considered fair within the context of rapid growth.
- Experts advise adjusting expectations to avoid over-enthusiasm, acknowledging that signs reminiscent of the dot-com bubble era may warrant caution.
AI Stock Rally: Optimism Amidst Market Caution
Institutional investors from major firms like Fidelity International and Allianz Global Investors are signaling that the current surge in AI-related stocks is far from over. They argue that the rally demonstrates substantial potential for continued growth, pushing back against widespread concerns that the market may have become overextended.
AI developers are indicating significant future investments in their industry, driven by increasing user adoption of their products. Joseph Zhang, a Portfolio Manager and Client Solutions Investment Director at Fidelity International, views the recent downturn in global semiconductor stocks as a temporary setback.
Zhang predicts a market recovery unless there’s a notable decrease in either the usage of AI or the capital being invested in it. The party is still just getting started, he remarked, cautioning that exiting the market prematurely would be a misstep, particularly given his oversight of over $10 billion in assets at Fidelity.
Investor Sentiment on AI Excitement
Market analyses reveal that concerns about a potential bubble have led some prominent investors, including SoftBank Group Corp. and Peter Thiel, to divest from AI-related assets. These investors are known for their significant contributions to the tech and finance sectors.
However, the outlook from fund managers at Fidelity International and Allianz Global Investors suggests a more sanguine perspective. They point to substantial ongoing investments, like those in new AI initiatives from figures such as Jeff Bezos, as evidence that the current growth phase is not merely a passing trend but a fundamental technological revolution.
Hartwig Kos, head of growth multi-asset at Allianz Global Investors, echoed this sentiment. He emphasized that the full capabilities of AI are still not widely understood, making it premature to label the current market excitement as a bubble.
Fidelity’s Zhang reinforced this view by stating that there are no clear indicators of a significant AI slowdown. He cited the absence of reduced usage, declining capital expenditures, or disruptive technological advancements that would diminish the demand for AI-related infrastructure like chips and data centers.
He further noted that profitability from AI firms and memory chip prices continue to trend upward. We feel quite optimistic about the overall technology and AI trends in the medium term, Zhang added.
Despite this optimism, recent market movements have prompted questions about the sustainability of AI’s momentum. Following several months of gains, US semiconductor stocks experienced profit-taking in November, leading to a 9.4% drop in the US chip index within the month—its worst performance since March. Similarly, an Asian counterpart index saw a decline of approximately 7.3%.
Mark Boulton, lead portfolio manager at Pictet Asset Management, advised investors to temper their expectations regarding AI, suggesting that excessive optimism could lead to eventual disappointment. Analysts also pointed out that early warning signs, reminiscent of the dot-com bubble, are beginning to emerge, suggesting that maintaining a bullish stance on AI requires overlooking such signals.
Nvidia’s Earnings and Market Impact
The Magnificent Seven, a group of influential US tech companies including Nvidia, Microsoft Corp., and Apple Inc., have been major drivers of the S&P 500’s performance. Nvidia, in particular, has reached a market valuation that surpasses the combined stock markets of countries like Italy, Spain, the UAE, and the Netherlands.
Investing in the AI sector within Asia may present unique challenges, including trade tensions and economic instability in China, requiring an even stronger conviction in the technology’s resilience.
Zhang suggested that some of the recent market activity, including share price declines, might be attributed to hedging strategies employed by investors in anticipation of Nvidia’s earnings report. The purchase of put options on Nvidia shares could be influencing market dynamics.
He anticipates that a strong earnings report from Nvidia could lead investors to unwind these hedges, potentially triggering a market rebound. Currently, Nvidia, a global leader in AI, is trading at 29 times its projected earnings for the upcoming year.
Zhang considers this valuation to be fair, especially when weighed against its robust growth trajectory. He also noted that its key Asian suppliers, Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co., appear to be trading at even more attractive price points.
“As long as these core factors remain unchanged, corrections driven by liquidity often present buying opportunities,” he concluded.
Final Thoughts
The current market enthusiasm for AI is generating divergent opinions among institutional investors. While some express caution and consider potential bubble risks, key players like Fidelity International and Allianz Global Investors maintain a strongly optimistic outlook, viewing AI as a transformative technology with significant growth ahead. The upcoming performance of major AI players, notably Nvidia, will likely be a critical indicator for market direction and investor strategy in the near term.
