Topwall Street economists have alarmed at AI stocks' sky ratings, comparing them to the tech bubbles of the late 1990s.
“Yes, AI will do incredible things for all of us,” Torsten Sløk, chief economist at Apollo Global Management, said in his opening bid for Yahoo Finance. “But does that mean I should buy a tech company with every rating?” (Disclosure: Yahoo Finance is owned by Apollo Global Management.)
According to Sløk, the answer is increasingly no. In a research note to clients this week, he pointed out internal data showing price-to-earning ratio (P/E) for 10 large companies on the S&P 500 (^GSPC). Many of them see the P/E levels seen by AI stock picks such as Meta and NVIDIA (NVDA) at the height of the 1999 Dot-Com Bubble.
It shows a dangerous concentration of investor exposure at just a handful of high-tech giants, Sloak argued.
“Nearly 40% of the S&P 500 is made up of 10 big companies,” he said. “So, if you receive $100 as an investor and buy an S&P 500, I think I'm exposed to 500 different stocks, but I'm just betting on Nvidia and the AI storyline that continues.”
In his note, Sløk pointed out that the current valuation of Megacap Tech stock, and its overall index, may not be sustainable. His concerns have been repeated on Wall Street's growing unease about how many of the recent stock market rally has been driven by AI Euphoria and momentum trading.
BTIG analysts flagged similar warning signs in a memo this week, describing market sentiment as “bubbly,” increasing the chances of a short-term pullback for high-flying AI names.
Their focus was on the Buzz NextGen AI Sentiment Index, a benchmark for AI-related stocks popular among retail investors. The index has grown by 45% over the last 16 weeks, 29% above the 200-day moving average. Both are the best since early 2021, when speculative technology stocks peaked. According to BTIG.
“Do you get more like we did with '20-'21? Of course,” wrote BTIG analyst Jonathan Klinsky. “But tactically, this feels a bit extreme for us.”
Krinsky also warned that top holdings in indexes, including Rocket Lab (RKLB), Coinbase (Coin) and Unity Software (U), show “vertical” chart patterns, making them increasingly vulnerable to “short-term shakeouts.”
The memo suggests investors will consider turning into a more defensive sector, such as utilities and Chinese technology, which have been integrated for several months.
Apollo and BTIG notes point to an increasingly divided market between long-term optimism about AI potential and short-term concerns that evaluation and focus are too fast.
