Since the Great Financial Crisis, and especially since the release of the “The Big Short” in 2015, commentators have been quick to label any fast-appreciating investment as a “bubble”. The latest fixation is on the so-called “AI bubble”. The idea behind an investing bubble is that an increase in prices is not supported by sturdy fundamentals and thus vulnerable to popping and causing investment losses. We think this description is unwarranted given today’s technology landscape. We discussed this idea on our November mid-month call, but we think it is worth re-iterating here.
First, there are structural supports to artificial intelligence investment. The global workforce population growth is slower than that of the total global population. This means workers account for a decreasing share of the population, yet they still must produce enough goods and services to provide for everyone. Such a labor shortage requires large technology investments and productivity gains to fill the gap. This demographic condition has previously fueled technology investment booms in the US in the 1950/60s and 1990s. The current global demographic situation is likely to persist for many years, providing a long-term tailwind to artificial intelligence investment.
Secondly, the leading companies in the artificial intelligence industry are highly profitable; advances in stock prices have generally been supported by corresponding increases in earnings. The price/earnings multiples of the 7 largest AI-focused technology stocks have not changed since the release of Chat GPT 3 years ago, despite their collective stock prices more than doubling (data according to CFRA). Instead of a bubble supported by just air, think of an emerging skyscraper with a solid foundation.
Paraphrasing a Broadcom executive, the recent AI investment boom is not a “build it and they will come” situation. It is a “build it because they are already here” situation. Today, only about 2% of data center capacity is empty. By comparison, in 2002, in the aftermath of the telecom bubble, just 2.7% of installed fiber optic lines were being used (data from the Wall Street Journal). This data suggests demand supports the recent large data center investments.
Euphoric sentiment, typically a feature of unwarranted bubble-like appreciation, is conspicuously absent today. We have written extensively about 2025’s historic negative sentiment and how sentiment is a contrary indicator at extremes. When the next true bubble forms, history tells us that sentiment gauges will be at extreme levels of optimism.
Lastly, I would note that investing, including in technology, is not without risk. There are some legitimate concerns around the AI industry, notably the circular financing between companies and large promised future spending. We would note that Wall Street is skeptical of those announced spending commitments and they are not reflected in future earnings estimates for their recipients. We fully expect that there will be several, potentially sharp, pullbacks in technology stocks over the coming years. But risk and return are two sides of the same coin; you cannot have one without the other. The key for us is investing in the right companies in the right amounts.
The overall stock market saw a 5% dip in November before rallying back to finish close to flat for the month. The balance of the indicators still suggests the market is on strong footing. We are monitoring early signs of a change in leadership; Healthcare and Financials are among the sectors that have gained strength recently. We will continue to follow our process in an attempt to tilt accounts towards areas of strength in the market.
This is being provided solely for informational and illustrative purposes, is not an offer to sell or a solicitation of an offer to buy any securities. The factual information given herein is taken from sources that we believe to be reliable, but is not guaranteed as to accuracy or completeness. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed here.
