Will the AI boom become a bubble? – The Prosperity Project

The Nasdaq has risen sharply in recent years prompting jitters about a correction. Photo / New York Stock Exchange

The rapid rise of artificial intelligence stocks has investors and market watchers asking if the market is heading for another bubble – like the dot-com bubble that burst in the early 2000s.

Artificial intelligence (AI) chip maker Nvidia’s market value surging through US$4 trillion ($7t) in July and then above US$5t in October – it’s now worth more than every listed company in the United Kingdom combined.

Unfortunately: “Bubbles are always hard to identify until afterwards, when they’ve burst,” Craigs Investment Partners investment director Mark Lister told Nadine Higgins on The Prosperity Project podcast.

However: “I’m hesitant to use the word bubble,” Lister said. “The market is definitely expensive and investors need to be mindful of that.”

The rally isn’t solely based on hype, he said – there are some big numbers being generated by the top players. “If you look at the earnings behind Nvidia, Microsoft, Amazon and Google, the earnings are also going up and to the right. Share prices do follow earnings – that’s the ultimate fundamental driver.”

Still, he warned investors not to forget the lessons of the dot-com boom and bust. “You can have a good business, but if you overpay for it, you turn a good business into a bad investment. That was the case back then. There’s a bit of that today.”

While Lister isn’t predicting a crash, the meteoric rise in Nvidia’s share price will inevitably slow. “The US market is up about 80% in three years – Nvidia’s probably up a thousand per cent. That isn’t sustainable.”

Investment advisers always encourage people to diversify their investments, but that can be tricky at the moment, as the big tech stocks make up a huge proportion of the likes of the S&P500. “Even if you buy a global fund, you’re still heavily weighted to the US. People need to make sure they’re not all in on the AI trade.” Lister said.

He suggested investors ask questions of their adviser or KiwiSaver fund manager.

“Say, well, how are you positioned? What are you doing to protect us against a potential bubble slash overvaluation in some of these stocks or sectors?”

But he also advised remaining calm. “Markets rise 75% of the time. There’s always something to worry about – but if you wait until everything looks perfect, you’ll be on the sidelines permanently.”

Listen to the full episode of The Prosperity Project for more.

The podcast is hosted by Nadine Higgins, an experienced broadcaster and a financial adviser at Enable Me.

You can follow the podcast at iHeartRadio, Apple Podcasts, Spotify or wherever you get your podcasts. New episodes are released every Monday.