Artificial Intelligence Stocks May Be Overheating

The excitement surrounding artificial intelligence stocks is starting to mimic previous market bubbles, according to prominent investor Richard Bernstein. He cautions that the sector might be reaching unsustainable levels.

In a blog entry released on 30 June, the Chief Investment Officer at Richard Bernstein Advisors, a firm managing $15 billion in assets, drew parallels between the current AI fervour and the dot-com bubble of the early 2000s, as well as the “Tronics” craze of the 1960s.

“Investors seem universally focused on ‘AI’, which seems eerily similar to the ‘.com’ stocks of the Technology Bubble and the ‘tronics’ craze of the 1960s,” Bernstein noted, as referenced by Business Insider. “Meanwhile, we see lots of attractive, admittedly boring, dividend-paying themes.”

Following the debut of ChatGPT in November 2022, markets have surged dramatically, with the S&P 500 gaining 54% and the Nasdaq 100 skyrocketing by an impressive 90%. Currently, valuations are nearing historic peaks, approaching those witnessed during the dot-com boom and the 1929 market summit.

While Bernstein clarified that he does not aim to time the market, he emphasised that significant trading trends eventually reverse. “The best time to invest in something is when it’s out of favour — not after a massive rally has occurred,” he remarked.

He elaborated that investor behaviour typically evolves with the market cycle. “At the beginning of a bull market when momentum and beta strategies are by definition most rewarded, investors’ fears lead them to emphasise dividends and lower-beta equities,” he stated. “In later-cycle periods when dividends and lower beta become more attractive, investors’ confidence leads them to risk-taking and momentum investing.”

Bernstein asserts that the current environment aligns with the latter scenario. “We clearly are not at the beginning of a bull market and, as we’ve previously written, the profits cycle is starting to decelerate,” he noted.

In this context, he argues that dividend stocks, especially within the utilities sector, may be positioned for growth. Such companies typically provide consistent dividends, which investors can utilise as income or reinvest for compounded gains.

“One of the easiest methods for building wealth has historically been the power of compounding dividends,” Bernstein explained. “Compounding dividends is boring as all get out, but it’s been highly successful throughout time.”

He highlighted that over the long term, reinvesting dividends in utilities stocks has generated surprisingly robust returns. “In fact, compounding dividend income has been so successful that the Dow Jones Utilities Index’s returns have been roughly neck-and-neck with NASDAQ returns since NASDAQ’s inception in 1971,” he remarked.