Are worries over an AI bubble justified?

After $1 trillion was wiped off a handful of big AI-related stocks last week AJ Bell's Russ Mould gives his take on current 'lofty' valuations. He also believes we'll get more clues about the sector when CoreWeave (CRWV) reports after today's closing bell. For more live coverage of the markets, watch the full episode of Market Sunrise and visit Yahoo Finance.

Video Transcript

0:01 spk_0

Welcome back. Well, AI is on everyone's minds and worries of a bubble knocked more than $1 trillion off the value of a handful of the biggest AI related stocks last week, including Nvidia and Meta. The increasing sense of panic about the valuations of Silicon Valley's big shots as they splash out unfathomable sums of money on AI infrastructure was largely to.Blame for the round, but signs of weakness in the US economy didn't help. But this morning those big players are firmly in the green, led by Nvidia there, up about 3% in the pre-market. So our fears of an AI bubble justified? Well, to help answer that, I'm joined by Russ Mold, investment director at AJ Bell. Russ, thanks so much for joining us. Well, let's start with that question. Are these worries justified about an AI bubble?

0:45 spk_1

Well you're probably asking the wrong person because I'm not sure I've predicted that the valuations would get to where they are at the start of the year, so that they've already made a fool of me once. You, you can understand why the, the, the concerns are there. Valuations do look lofty on conventional metrics.Uh, you can certainly see concerns gathering over some of the circular nature of the fundraising that these companies are going and questions of where does OpenAI get its $1.5 trillion from. And also even in terms of the companies that seem to be particularly well positioned right now, say, Alphabet, for example, Alphabet.Amazon, uh Meta, these companies are now moving from being very asset like to potentially very asset heavy businesses because of all the building that they're doing, and also they're now starting to encroach upon each other's competitive patch. So you are seeing some different dynamics there, ones that may challenge at least raise questions over those lofty evaluations which they, they seem to deserve at the moment.

1:35 spk_0

And we'll get a bit more sort of clues about where AI is going. We hear from Creweave after the bell tonight. What are you hoping for?

1:43 spk_1

Yeah, I think again what you'd be looking for there is the company talking about backlog, talking about visibility and talking about pricing, and I think those will be the issues that investors will be focused upon. And again, you know, any signs of any weakness in demand won't be taken very well. Any signs of extending backlog and strong visibility, I'm sure will be taken positively. But you know, as somebody who was around in late 19 the 9.1990s as a technology equity analyst, the one thing you always need to be careful of is when you have companies saying we're sold out for the next two years, the market might just start to think, well, if it's that good, it can't get any better, and if it can't get any better, then one day it might start to get worse, and that was one of the sort of early tipping points in the TMT bubble in the late 90s, so watch out for that one.

2:21 spk_0

Now, we'll be talking a bit more er more about Nvidia later in the show as well, but it's also, you know, had that issue with China, with Blackwell chips. How do you see this all playing out?

2:31 spk_1

Yeah, I mean, Jensen Wang was very clear with his guidance for the quarter that there was no attempt to include any any benefits from Chinese business in the period. We've already seen them take a big write down earlier on in the year, and the the the the summit that we got between President Trump and President Xi in South Korea at the end of last month.It seems to be enough to keep President Trump happy, and indeed President Xi, but there wasn't anything that tremendously conclusive came out of it, apart from a reduction in tariffs from the US, soybean agreements, one or two others. Technology still seems to be a pressure point between the two superpowers, and I suspect that may remain the case for some time.

3:05 spk_0

I suppose you'll be watching their results next week very closely indeed, Ross. Alright, let's move on to uh President Trump and this $2000 dividend. What did you make of that?

3:16 spk_1

Yeah, it's, I mean, cynics will say, well, the timing's intriguing after a week of some poor election results, the ongoing government shut down, a bit of a wobble in the stock market, and that that terrible University of Michigan consumer confidence number right at the end of the week. Equally supporters of the president will say, look, this is all part of the master plan.We're looking to run the US economy hot. We're looking to get interest rates down, keep the oil price low, deregulate, cut personal taxes and get growth going. So they'll say it's all very much part of the master plan, and it's evidence that maybe tariffs do work after all, I think the jury's probably still out there.

3:48 spk_0

But the, the news of this $2000 dividend is certainly having an impact on markets, certainly crypto and in in gold, right?

3:56 spk_1

Yeah, you can see gold and crypto prices nudging higher. You can also see US 10 year treasury yields nudging a little bit higher. So yes, economy run hot may be positive in one ways, but it does keep the inflation vigilantes worried in another, on the other side of the coin. And again, that's where for those maybe those sort of haven assets or store value assets are having a bit of a run as well. But I'm sure the S&P 500 won't be too upset about the prospect of a hot US economy if indeed that's what we get.

4:21 spk_0

So where does that leave the Fed in at the end of the year then?

4:25 spk_1

Yeah, they'll be looking at this again, probably slightly through through parting fingers, particularly given that they're still slightly data blind as well. I mean, the market is at the moment, perhaps you can argue, having its cake and eating it, looking for hot US economic growth, but still further interest rate cuts. The two don't necessarily sit together that well. It's an ongoing policy dilemma for the US Federal Reserve, at least until Mr. Powell, um, steps aside next spring.

4:48 spk_0

And when he, if he does step aside next spring, where do you see the Fed policy going beyond that then? Are we gonna, are they gonna do pretty much what President Trump wants, or do you think they'll still have that level of independence?

5:01 spk_1

You, everybody would like to think that they have that level of independence. I think one of the reasons why the US dollar wobbled a little bit at the start in the middle of the year, and indeed American equity as it did as well, with some concern over that loss of independence. So I think that would be very much what markets want to see. Equally, you know, rate cuts generally go down pretty well. So again, markets may be able to have their cake and eat it, providing inflation doesn't boil over.

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