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We recently compiled a list of the 13 AI News and Ratings on Wall Street's Radar. In this article, we are going to take a look at where NVIDIA Corporation (NASDAQ:NVDA) stands against the other AI stocks on Wall Street's radar.
In his latest memo named “On Bubble Watch,” Howard Marks, co-founder and co-chairman of Oaktree Capital, highlighted several warning signs in the stock market, including high valuations that may lead to poor long-term returns or short-term declines. While not calling it a bubble, he pointed to the S&P 500’s elevated price-to-earnings ratio, which historically correlates with lower returns. Marks also expressed concerns over AI investments' excessive enthusiasm and overconfidence in the Magnificent Seven tech stocks, which have contributed significantly to the S&P 500’s recent gains. Marks also wrote:
“.....when stocks rise too fast – out of proportion to the growth in the underlying companies’ earnings – they’re unlikely to keep on appreciating. Michael Cembalest has another chart that makes this point. It shows that prior to two years ago, there were only four times in the history of the S&P 500 when it returned 20% or more for two years in a row. In three of those four instances (a small sample, mind you), the index declined in the subsequent two-year period. (The exception was 1995-98, when the powerful TMT bubble caused the decline to be delayed until 2000, but then the index lost almost 40% in three years.)
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the optimism that has prevailed in the markets since late 2022,
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the above average valuation on the S&P 500, and the fact that its stocks in most industrial groups sell at higher multiples than stocks in those industries in the rest of the world,
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the enthusiasm that is being applied to the new thing of AI, and perhaps the extension of that positive psychology to other high-tech areas,
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the implicit presumption that the top seven companies will continue to be successful, and
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the possibility that some of the appreciation of the S&P has stemmed from automated buying of these stocks by index investors, without regard for their intrinsic value.”
READ ALSO: 15 AI Stocks That Skyrocketed in Q4 and 14 AI Stocks Making Waves on Wall Street.
Assessing the Future of AI Valuations
According to the JP Morgan report, AI investing: More broadening than bubble, the current valuation gap between the largest AI-linked companies (Mag Seven) and the rest of the S&P 500 is unlikely to last. These companies now represent a significant portion of the S&P 500’s market cap and have driven a substantial portion of its returns since 2023. While the AI industry is expected to fuel the next tech revolution, the important question for investors is whether market expectations are realistic.
