Where Do We Go from Here?
In our third quarter management letter to clients, we discuss stock market gains so far this year, despite significant headline risk including tariffs, concerns over employment levels, inflation, and a government shutdown. It is counter-intuitive that investors continue to see their portfolios grow in the face of these headwinds. Some commentators describe the current market as having a sugar high resulting from large, ongoing investments in artificial intelligence (AI). Indeed, 75% of the S&P 500 Index gains since ChatGPT launched in November 2022 are from AI-related stocks. That number alone should strike fear in the hearts of any investor who had money in the market during the previous tech bubble that peaked in 2000.
I am not alone in seeing parallels between that dotcom bubble and this AI fueled bubble. The Guardian reported the following reasons to be concerned:
1. Valuations are high. Not as high as 1999, but still very high.
2. Too much market concentration.
3. Increasing correlation risk as the different AI players invest in each other’s technology.
4. Basic economic conditions, including inflation and de-globalization that can impact supply demands, are not as favorable as they were in the 1990s.
Another factor to consider is the relative lack of regulation on AI. While the EU is drafting laws to govern AI, the U.S. is going the opposite direction and deregulating, leaving states to pick up the slack.
More importantly, the anticipated growth of AI that is supporting huge capital expenditures on data centers and other infrastructure buildouts now just isn’t translating to comparable revenue and may not be for years to come. Looking back at the 1990s, one can see the similarities between AI infrastructure building and fiber-optic cable.
More importantly, the anticipated growth of AI that is supporting huge capital expenditures on data centers and other infrastructure buildouts now just isn’t translating to comparable revenue and may not be for years to come. Looking back at the 1990s, one can see the similarities between AI infrastructure building and fiber-optic cable.
Now that you know the historical context for the potential risk and how that risk translates in terms of popular investment options, where do you go from here? If you are relatively young and risk tolerant and have time for things to go very badly and then work their way back up again, then the easy answer is nothing. As a younger investor in the 1990s to early 2000s, I was not too concerned about the state of my retirement portfolio because I was just starting to build it. However, now that I am within daydreaming distance of retirement (5 to 10 years), the amount at risk and the uneasiness I feel about this situation suggest some portfolio adjustment. Since a lot of the current risk concentration is in large cap core and growth funds, it may be appropriate to shift into value funds or add to other areas of the market, such as domestic mid or small caps or international funds. If you fear an overall market correction because of how intertwined all the stock elements are, then reducing equity exposure overall might be a good idea.
Regardless of what strategy you take or don’t take, rest assured that markets will always go up and down and trying to time any moves is a dicey proposition. Just as time heals all wounds, so does it erase losses from market corrections. If you have any questions about how to structure your portfolio to meet your personal goals, feel free to reach out to your relationship manager or the financial planning team at any time.
https://www.theguardian.com/technology/nils-pratley-on-finance/2025/oct/08/the-ai-valuation-bubble-is-now-getting-silly
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