Is the Air Starting to Seep Out of the AI Bubble?

Wall Street suddenly seems concerned about tech valuations

I’ll be straight with you.

I don’t know if this is “it.” I can’t tell you with any certainty that this recent bout of market weakness is the start of a real rotation out of hypergrowth AI stocks and into more tangible “old economy” stocks.

And I’m even less confident that this is the start of a broader bear market. By this time tomorrow, it’s entirely possible that investors rediscover their animal spirits and send tech stocks to new all-time highs.

But the market narrative today — that tech stocks are expensive and that investors are overpaying for growth that may or may not ever materialize — is spot on. It’s a rare moment of relative sobriety in a market where investors have had zero appreciation for risk.

Japanese investment firm SoftBank — which is about as close to a pure tech permabull as you’re ever going to find — really set the mood this morning when it announced it has liquidated its entire position in Nvidia (NVDA).

SoftBank founder Masayoshi isn’t bearish, per se. He claims to be freeing up cash to fund other AI projects. But it’s still the sort of headline that gets your attention. If one of tech’s biggest permabulls is finding better opportunities elsewhere… maybe the Nvidia AI trade has run its course.

Meanwhile, Palantir (PLTR) posted its 21st straight revenue beat last week with 63% year-over-year growth and raised its full-year guidance. Yet that wasn’t enough to send the shares higher. To be fair to Palantir, I don’t know that any company in history could have lived up to the expectations implied by a price earnings ratio that was over 500 at the time.

High valuations alone don’t cause a bear market. But they do make a potential bear market far more painful.

So with that said, let’s take a look at what has Wall Street spooked, starting with the biggest AI stocks.

Really stop and marvel at the valuations before you. As recently as last week. Nvidia has a market cap of over $5 trillion. Even at its current $4.7 trillion, that’s larger than the entire entire economy of every country in the world except the U.S., China and Germany. And it’s within spitting distance of Germany.

Nvidia by itself is 15% the size of the entire U.S. economy. Throw in Apple (AAPL) and Microsoft (MSFT), and the three together are more than 40% the size of the U.S. economy.

Yes, all of these companies are phenomenal success stories and some of the most innovative companies in the history of American capitalism. But does it really make sense for Apple to trade at 10 times sales when its last major product innovation was the iPhone… back in 2007?

What would Tesla (TSLA) need to grow into in order to justify a price/earnings ratio of 291?

These numbers simply don’t make sense. Even if the wildest AI profit scenarios come to pass, it’s hard to see a lot of continued upside with prices at these levels.

Of course, the S&P 500 has 491 more stocks. How does pricing look for the index as a whole?

Not great.