Hong Hon, Manager, Global Equities, Lonsec Research and Ratings
As we enter the second half of this year’s global equities review cycle, one of the most frequently discussed topics has been whether there is a bubble in artificial intelligence stocks. From hyperscalers, such as Microsoft and Alphabet, ploughing more and more capital into data centres, to chipmakers generating one record profit after another, ‘AI’ has become the defining principle of technology spend and market leadership.
Yet the question remains – are we witnessing a speculative bubble, or is it a rational repricing of a multi‑decade structural shift?
Valuation backdrop
Many managers begin by highlighting the valuation backdrop, comparing the current Shiller CAPE (Cyclically Adjusted P/E) for the S&P 500 that has been hovering around 40 with that during the dot‑com boom of 44, well-above its long‑run average of around 17.
While some managers also highlight that valuation alone has not historically caused a market crash, it does imply lower forward returns and thinner margins of safety. Also, when combined with the concentrated market leadership – the ‘Mag Seven’ (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, Tesla) now represents around a third of the S&P 500 – and dependency on the AI theme, it does present classic hallmarks in bubble diagnostics.
Fundamentals
Bullish managers have also been quick to point out that Nvidia – arguably the bellwether of AI infrastructure, continues to post record quarterly revenues, gross margins and earnings, with guidance for more to come and rebutting claims of the speculative demand. Semiconductors remain in short supply as hyperscalers and model developers race to secure the latest Blackwell GPUs, suggesting demand to be structural rather than inventory building. Additionally, investment in data centre has exploded, particularly by hyperscalers.
However, the picture is mixed further down the supply chain. Some managers have witnessed some revenue uplift, while many are yet to see any measurable earnings impact despite anecdotal feedback of productivity benefits. This lag in monetisation raises the risk of overbuilding and valuation compression – a dynamic reminiscent of telecom capex during the dot‑com boom.
Circularity
In recent months, concerns have intensified around the circular nature of financing and demand. Some managers have noted the complexity in several deals whereby hyperscalers, AI startups and compute vendors enter into arrangements that blurs true end‑user demand and stoking fears of ‘artificial demand’.
Another emerging concern has been that many analysts now believe the useful lives for cutting‑edge GPUs may be 2-3 years rather than the 5-6 years assumed in many models, implying much higher depreciation charges. If correct, the added depreciation could become a drag on earnings and materially impact earnings quality and valuation multiples.
Finally, the tilt by hyperscalers to debt‑funded capex could evolve into macro risk if monetisation falls behind expectations, especially for smaller ecosystem players and private credit lenders exposed to data centre and GPU collateral.
Similar historical periods
While comparisons to the dot‑com boom are tempting, many managers also highlight that the comparisons are imperfect. Similarities such as valuation extremes, capital intensity, index concentration and narratives of ‘this time is different’ are juxtaposed with differences such as that market leaders today are highly profitable, AI is already embedded across the cloud, as well as the need for developers to tool-up.
Nevertheless, there are segments of the market – unprofitable startups and long‑dated compute bets, that resemble dot‑com froth, where capital has been chasing optionality ahead of cash flows. Similar periods previously have been less about timing and more about unit economics: multiple contraction follows when capex outpaces monetisation, while premium valuations persist when earnings prove durable.
Conclusion
On balance, more managers believe that AI is real and likely to reshape productivity, as well as software and hardware cycles. While upstream cash flows today are indisputable, the risk of bubble continues to gather downstream, especially if monetisation remains uneven, and depreciation and financing burdens weigh more heavily than modelled.
In other words, we may be at the bubble’s edges with frothy valuations, rich multiples justified by extraordinary profits upstream and a capex cycle that must be justified over the next 2-3 years. While markets remain expensive during this transition period, positioning and risk control will matter.
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