Global equity markets are on a tear. The MSCI World Index, a gauge of stocks in advanced economies, has risen 33 per cent to an all-time high since US President Donald Trump paused his “reciprocal” tariffs on most of America’s trading partners on April 9.
While Trump’s tendency to back down has buoyed sentiment, the driving force behind the rally is the hype around generative artificial intelligence (AI). In the US, which has a 72.4 per cent weighting in the MSCI World, the market capitalisation of the benchmark S&P 500 index has increased by US$21 trillion since the launch of ChatGPT, a popular AI chatbot, in November 2022.
More strikingly, just 10 companies account for over half the rise in the value of US stocks. The upward revision to earnings growth for the S&P 500 next year is entirely attributable to the “Magnificent Seven”, the group of leading US technology firms. Earnings expectations for the rest of the 493 companies in the index have not budged, denoting “an extreme degree of concentration in the S&P 500”, said Torsten Slok of Apollo Global Management.
According to Societe Generale, the top 10 stocks account for a third of the S&P 500’s earnings and a fifth of the MSCI World’s profits. “Such concentration might look impressive on paper, but it comes at a steep price: the erosion of diversification, leaving portfolios increasingly exposed to a narrow slice of the market’s fate,” Societe Generale said.
It is the fate of AI that is the most hotly debated topic in markets right now. Many analysts, investors and academics believe the AI-fuelled stock market is in a bubble. According to the findings of the latest Bank of America Global Fund Manager Survey on October 14, 33 per cent of respondents believed an AI equity bubble was the biggest “tail risk” for markets, up from 11 per cent in the September poll. An overweight position in the Magnificent Seven stocks, moreover, was considered to be the most popular trade.
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Nvidia CEO Jensen Huang praises China’s AI progress following chip sales approval
Nvidia CEO Jensen Huang praises China’s AI progress following chip sales approval
Some investors admit that the surge in investment in AI has created a bubble, typically defined as a phase marked by a dramatic escalation in asset prices whereby valuations become detached from the realistic prospects and earnings power of the assets in question.
