In the midst of all the excitement about artificial intelligence tools and several of the biggest companies in the space planning to go public, the conversation about whether the market might be in a bubble has been pushed to the sidelines. But speakers at the Wealth Management EDGE conference at The Boca Raton Resort in Boca Raton, Fla., think the answer might be a “yes,” though advisors can mitigate the negative impacts for their clients.
Today, the biggest argument against the idea that AI company valuations might be creating a bubble is that these companies can show earnings growth, said Cameron Dawson, chief investment officer at NewEdge Wealth. What people forget is that companies involved in previous market bubbles also had earnings, Dawson said. When the process of building out infrastructure for an emerging technology is taking place, there will almost always be earnings growth—but there will also inevitably be a certain level of speculation, as there is today, she pointed out.
“Only in a speculative environment could you have the largest IPO ever, ever, ever for a company that has no profit and trades at 80x or 90x sales,” Dawson said. “That is endemic of where we are in the cycle. Whether or not this is 96, 97, 98, 99 or March of 2000, I don’t know.”
Part of the challenge that makes today’s situation murkier is that there aren’t enough smaller AI companies entering the public markets and being valued, said Alex Morris, co-founder and CEO at F/m Investments. In a healthy environment, there would be hundreds such firms seeking public capital, leading to greater transparency and a quicker price discovery, he said.
Ultimately, bubbles can only be definitively called in hindsight, according to Don Calcagni, chief investment officer at Mercer Advisors, who noted that speculation is an expected part of an innovation cycle in a capitalist economy. However, he agreed with Dawson that valuations in the AI sector are definitely stretched.
“What I’ve been asked is what do you do with this information?” Calcagni said. “I think you appropriately position size these types of companies in portfolios by not going overweight.”
Most investors who have been in the market since the 1990s already have exposure to AI stocks in their portfolios without having to do anything, Calcagni said. In his view, to adequately protect themselves against a bubble bursting, these investors need broad portfolio diversification, including most major global asset classes in both the public and private markets, ranging from stocks and bonds to infrastructure, real estate, private credit and venture.
Morris cautioned advisors that, today, in view of both the potential AI bubble and broader systemic risks such as rising inflation, it may not be the right time to take outsized risks.
“When times are less good, you really want to take fewer bets,” he said. “When things are more volatile and uncertain, that usually means the most boring portfolio you’ve ever seen because the goal is [not] to disappoint anyone.”
