Bears Calling the AI Top Might Be Early - Very Early

5 Reasons the AI Trade Still has Legs

Ever since OpenAI’s ChatGPT went live and subsequently became the fastest-growing application in history, artificial intelligence stocks have won the hearts and minds of Wall Street investors. Since then, Wall Street’s most successful, sophisticated, and cash-rich companies such as Alphabet (GOOGL) and Meta Platforms (META) have spent hundreds of billions of dollars in capital expenditures (CAPEX) on expensive data centers, energy to fuel those data centers, the Nvidia (NVDA) GPUs that train AI models, and top tech talent from Silicon Valley. While America’s top tech companies continue to deliver outstanding earnings, many investors are concerned that the AI boom is running on fumes, morphing into a classic, fundamentally absent market that could turn into a late-90s-esque bubble. These skeptics couldn’t be more wrong. Below are 5 reasons that the AI bull market is in its infancy and still has legs:

1.      General Market Forces and Fed-Induced Liquidity

Because 75% of a stock’s move can be attributed to the general market’s direction, before analyzing AI stocks themselves, it’s critical that investors implement a top-down approach and first explore the general market. More often than not, high-growth technology stocks lead the market, both up and down.

Legendary investor and billionaire Stanley Druckenmiller is one of the most consistent and successful investors of all time. Druckenmiller has repeatedly said in interviews that the Federal Reserve’s liquidity measures are the single most important driver of stock prices. In other words, the more money sloshing around in the system, the higher stocks will go. That’s good news for investors, considering that the chances of Jerome Powell and the Federal Reserve cutting interest rates in December is over 80%.

Additionally, Trump ally and “dove” Kevin Hassett is the overwhelming favorite to replace Jerome Powell as the Chair of the Federal Reserve – a bullish omen.

2.      Unfounded Fears Have Caused Depressed Prices

Wednesday morning, artificial intelligence-related stocks fell after a news outlet reported that Microsoft (MSFT) revealedthat it has “lowered expectations for how quickly it can get customers to spend money on newer AI products, known as agents, after many salespeople missed sales-growth goals.”

However, the news appears to have been misread by Wall Street. According to Microsoft, it has NOT lowered sales quotas for salespeople. Meanwhile, investors must remember that although Microsoft is a leader, competitors such as Google are playing catch-up.

In other words, Microsoft and OpenAI are no longer the only game in town.

3.      Productivity Boom is in its Infancy

Companies that benefit directly from AI revenue are not the only ones that will benefit from the AI boom. AI is likely to have a ripple effect across businesses of all kinds, helping them to automate, make better decisions, and increase margins.

4.      AI Valuations are Reasonable

Cisco (CSCO) was considered the market leader during the dot-com bubble of the late 1990s. At its peak, CSCO’s P/E ratio reached nosebleed levels of 200x. Conversely, Nvidia (NVDA), widely considered the AI leader, has a P/E of just 50x.

In other words, considering their growth rate and reasonable valuations, today’s AI stocks are cheap compared to the internet stocks of the dot-com bubble.

5.      AI is Beginning to Benefit Software Firms

More AI agents mean greater software as a service (SaaS) utilization. Database software company MongoDB (MDB) is a perfect example of AI’s positive impact on software earnings. Last night, MDB beat the high end of its own guidance numbers. Meanwhile, the company has beaten analyst expectations by an average of 69% over the past four quarters.

Bottom Line

While skeptics call for an AI bubble, the data suggests the opposite: we are only in the early innings. With supportive macro conditions, expanding real-world adoption, and valuations far from dot-com extremes, the AI trade still offers meaningful upside.

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This article originally published on Zacks Investment Research (zacks.com).

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