By As the U.S. equities market recovers from the 2022 bear market, there has been a lot of discussion around the artificial intelligence (AI) software craze and its impact on stock prices. Many are wondering just how high the market-leading AI stocks, such as Nvidia Corp., can carry the market. However, according to one analyst at Morgan Stanley, there is historical context that indicates the rally’s gains may already be looking stretched.
In a recent research report, equity strategist Edward Stanley analyzed 70 examples of bubbles from the past century. His findings reveal that, on average, bubbles rise by 217% during the three years leading up to their peak, with a median gain of approximately 154% over the same period.
These numbers should raise some concerns among optimistic investors. The “first derivative AI winners,” a group comprising stocks like Nvidia Corp., Microsoft Corp., Alphabet Inc.’s Class A and Class C shares, and other members of the megacap-technology basket, have already risen by about 200% year-to-date, according to Stanley.
However, when considering a broader basket of AI stocks, the gains appear more modest. This group has risen by approximately 50%, which puts it comfortably in the middle of the pack historically, as noted by Stanley.
Nevertheless, Stanley highlights that the largest U.S. tech companies have experienced faster and more sustained rises, with fewer pullbacks along the way, compared to previous bubbles.
This analysis invites investors to question whether the AI stock gains are already reaching their peak and warns against potential risks associated with an inflated market. Only time will tell if the AI software craze is indeed a bubble or if it will continue to propel the market further.
The Uniqueness of Current Market Conditions
The recent movements in the market have occurred in a unique environment where short-term U.S. interest rates are above 5%. This distinguishing factor sets the current situation apart when compared to historical standards.
According to the team at Morgan Stanley, not only have corrections during this rally been more subdued, but the standard deviations of returns have also been relatively restrained. In fact, when analyzing the 70 bubbles they’ve examined, it’s challenging to draw parallels between this rally and any other observed in the past.
To facilitate a comprehensive comparison, Morgan Stanley has compiled a breakdown of global macro bubbles as part of its analysis. The list includes notable “micro” bubbles such as bitcoin (BTCUSD) and ethereum (ETHUSD).
Additionally, Morgan Stanley has identified a collection of “thematic” bubbles, which encompasses the category an AI bubble would fall under.
While the market-leading “Magnificent Seven” technology stocks have experienced a pause in their year-to-date progress over the last couple of weeks, there seems to be a general stagnation in U.S. stocks as a whole.
On Tuesday, AI stocks faced a downward trend as the Nasdaq Composite (COMP) witnessed a 0.9% decline, reaching 13,867 in recent trading sessions. The broader U.S. stock market faced challenges due to negative news, including weak trade data emerging from China, which had a rattling effect on global markets.
The S&P 500 (SPX) followed suit by dropping 0.9% to 4,494, while the Dow Jones Industrial Average (DJIA) experienced a 0.5% decline of 183 points, decreasing to 35,295.
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