Goldman Sachs says we're not in an AI bubble (yet)
Add Axios as your preferred source to
see more of our stories on Google.
Illustration: Maura Kearns/Axios
The AI-fueled bull market has not reached bubble territory yet, according to Goldman Sachs, but investors should nonetheless focus on diversification as warning flags mount.
Why it matters: The call is yet another sign that the stock market can continue its climb before any bubble bursts.
What they're saying: Success for Big Tech firms "doesn't necessarily mean that there is a bubble in the market that is in imminent danger of bursting," writes Peter Oppenheimer, chief global equity strategist at Goldman Sachs.
Zoom in: Oppenheimer lays out three hallmark bubble traits:
- Rapidly rising asset prices (check).
- Extreme stock valuations (check).
- Rising significant systemic risks driven by increased leverage (this is just starting to take shape as some firms take on debt to fund their AI capex).
Between the lines: The current increase in asset prices is less of a concern than prior bubbles because "valuations are much lower."
- Bubbles will "develop when there is a combined surge in stock prices and valuations to an extent that the aggregate value of companies associated with the innovation exceeds the future potential cash flows that they are likely to generate," Oppenheimer says. Powerful and sustained profits are driving stock prices rather than excessive speculation.
Yes, but: Based on this view, earnings must keep pace with asset prices. It remains unclear how long that can continue, especially as expectations for the coming earnings season keep ticking higher.
- Goldman notes the "biggest risk is that earnings disappoint and investors start to question the sustainability of their current rates of return. This, at least, could trigger a significant correction."
- The Wall Street bank appears to agree with what San Francisco Fed president Mary Daly recently told Axios: Any AI bubble worst is "less likely to drive a broader collapse."
The bottom line: Earnings are supporting high valuations and rapid stock rallies. For now.
One fun quote: "I think the people that are talking about the AI bubble risk are the people that got out in March and April and didn't remember to get back in," Nancy Tengler, CEO and CIO of Laffer Tengler Investments, tells Axios.
