Vanguard Sounds Alarm on AI Stock Rally Correction Risk Looms

The recent surge in artificial intelligence stocks has potentially overestimated the technology’s immediate impact, leading to heightened risks of a market correction, according to investment giant Vanguard.

Joe Davis, chief economist at Vanguard, suggests investors have become overly optimistic in their AI investments, even when comparing the technology’s potential impact to that of personal computers, which transformed productivity and employment since their widespread adoption in the 1980s.

The $10tn asset manager’s stance adds weight to the ongoing debate regarding valuations of AI-focused companies following their remarkable gains. Davis estimates there is a “60 to 65 per cent” likelihood that AI will exceed the PC’s impact, yet current market valuations reflect a 90 per cent probability.

Drawing historical parallels, Davis notes, “From an economic perspective we’re roughly in the year 1992 but from the market valuation perspective, I can make the argument that we’re in 1997.” This comparison recalls the tech bubble of the late 1990s, when PC optimism fuelled a substantial market rally before its eventual collapse in 2000.

The S&P 500’s impressive 27 per cent rise this year has been significantly driven by AI-related stocks. Notably, Nvidia, the chip manufacturer crucial to AI development, has surged over 180 per cent, contributing approximately one-fifth of the index’s gains.

Davis emphasises that the primary beneficiaries of AI advancement might not be the current market leaders. “Its companies outside of technology that are actually using the technology — hospitals, utilities, financial companies,” he observes, adding that increasing competition in the AI sector could reduce returns for existing players.

While the timing of any potential market adjustment remains uncertain, Davis maintains a cautious outlook, particularly regarding the valuations of companies currently leading the AI revolution. The warning from Vanguard, as the world’s second-largest asset manager, serves as a significant counterpoint to the market’s enthusiastic embrace of AI-related investments.

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