Investors flocking to stocks associated with artificial intelligence could face a substantial price to pay, warns economist David Rosenberg. Known for his unconventional perspectives, Rosenberg believes that the growing enthusiasm surrounding AI is diverting attention from the risks of an impending recession. He expressed his concerns during an interview on CNBC’s “Fast Money,” stating, “There’s no doubt that we’re in a price bubble.” Drawing comparisons to the dot-com boom of the late 1990s, Rosenberg particularly highlights the recent breakout of the Nasdaq 100 index in the past six months, which he finds peculiarly excessive and overextended.
The excitement around AI reached new heights this week following Nvidia’s exceptional quarter. The chipmaker surpassed market expectations with a strong earnings performance, leading to an upward revision of its yearly forecast. Nvidia’s CEO, Jensen Huang, credited the surge in demand for their AI chips as a key driver of their success. As a result, Nvidia’s stock experienced a staggering 24% surge after the earnings report and has climbed by an impressive 133% over the last six months. Notably, other AI industry players such as Alphabet, Microsoft, and Palantir have also witnessed significant increases in their stock prices.
However, Rosenberg cautioned investors that this rally may not be sustainable in the long run. In a recent advisory note, he emphasized the temporary nature of the current market trends. He pointed out that breadth measures for the S&P 500 index are at their lowest since 1999, with only a handful of mega-cap companies accounting for 90% of this year’s price performance. Reflecting on the tech sector’s weightage in the S&P 500, Rosenberg highlighted that it now stands at 27%, a level reminiscent of the dot-com bubble in 2000, which eventually led to a dramatic crash.
While technology giants continue to outperform, Rosenberg identified worrisome trading activities in banks, consumer discretionary stocks, and transportation sectors. These industries, which have a significant impact on the overall economy, are currently experiencing a decline of over 30% from their cycle highs. Rosenberg drew attention to the similarities in their behavior before the previous four recessions, suggesting a pattern that should not be ignored.
In summary, Rosenberg’s perspective urges caution in the face of AI-related investments. While the allure of this emerging technology is undeniable, he advises investors to remain vigilant and consider the broader economic indicators, which may signal an impending downturn. With his astute observations and historical parallels, Rosenberg seeks to remind market participants of the potential risks associated with chasing AI-driven opportunities without acknowledging the wider economic landscape.