Tech stocks – Company names and logos are on display at the Nasdaq MarketSite at Times Square in New York City.
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The buzz around AI is beginning to look a lot like the dot-com bubble, TAM Asset Management’s CIO said.
James Penny told Bloomberg he thinks the market has gotten ahead of itself.
“What generates a recession rips apart the status quo. So one has to be wary of that high growth narrative,” he said.
The massive surge in tech stocks fueled by hype over artificial intelligence has been one of the defining market themes of 2023.
But it’s only a matter of time before the rally fizzles out, with the AI craze looking increasingly similar to the dot-com bubble of the late 1990s that eventually burst, according to TAM Asset Management’s chief investment officer.
The market has gotten ahead of itself, and expectations that the Federal Reserve will pause its interest-rates rises is also spurring the investor rush into stocks with high-growth potential, said James Penny, a veteran ESG investor.
“Companies that even mention the word AI in their earnings are seeing boosts to their share price, and that smells very much like the dot-com era,” Penny told Bloomberg on Monday. “I think the market has got a little bit over its skis. I’d put much larger odds on it coming down from here,” he added.
The S&P 500 is up nearly 13% and the tech-heavy NASDAQ 100 gained 28% year-to-date, propelled by stellar gains in mega cap tech stocks like chipmaker Nvidia, which has advanced 170%.
But Penny thinks there is a real risk of an economic downturn and “what generates a recession rips apart the status quo. So one has to be wary of that high growth narrative,” he told Bloomberg.
The AI trend ‘came out of nowhere,’ and now the market is racing to take advantage of it, Penny said. He pointed to how investors were quick to rush to tech stocks during the banking turmoil in March.
Penny said he’s adopting a ‘pick-and-shovel’ strategy of investing in AI – one that is selective and focused more on adopters of artificial intelligence, rather than manufacturers – to find “phenomenal companies” that are benefiting from the movement.
Not everyone holds this view about the AI trend, however. Wharton professor Jeremy Siegel recently said he doesn’t see the mania around AI stocks as a bubble — even if it’s impossible to predict when the peak will be reached.