There’s a growing disconnect between market valuations and business fundamentals among global small and mid-cap companies as artificial intelligence reshapes investor sentiment.
That’s according to Fairlight Asset Management, a global equities manager that is increasingly concerned about the market’s focus on AI.
“Markets have become highly focused on identifying potential AI winners and losers,” said portfolio manager and partner, Nick Cregan.
Cregan told an investor briefing last week that investors have become increasingly focused on potential AI-related disruption, even as many businesses in the quality SMID universe continue to deliver strong earnings growth and resilient operating performance.
“Markets have become highly focused on identifying potential AI winners and losers,” Cregan said.
“In the process, a number of high-quality small and mid-cap companies are being valued as though disruption is inevitable, despite continuing to produce strong operating results and maintain leading competitive positions.”
Fairlight noted that most portfolio companies either met or exceeded expectations during recent reporting periods, with no company reporting so far this quarter downgrading full-year guidance.
Yet that strength has not been recognised by the market, with businesses across sectors including property classifieds, consulting and information services trading near the bottom of their historical valuation ranges.
“This valuation compression reflects investor uncertainty rather than deterioration in underlying earnings performance,” Cregan said.
He also noted that 63 per cent of Fairlight’s portfolio companies currently have active share buyback programs in place – the highest level of buyback activity observed across the portfolio since inception.
Additionally, Fairlight has seen increased insider buying activity and growing interest from private equity investors in companies trading at discounted valuations.
“We continue to see a significant disconnect between market expectations and business fundamentals,” Cregan said. “For long-term investors, that is creating attractive opportunities across a range of quality global small and mid-cap businesses.”
Meanwhile, a new Morningstar report has found that volatility in early 2026 has made artificial intelligence valuations more attractive, potentially creating an entry point for investors.
The Opportunities in Artificial Intelligence report said AI bubble risks appear limited, with semiconductor demand continuing to exceed expectations.
“The most AI-exposed stocks currently screen as the most attractively valued.”
Morningstar found that most firms with AI exposure are concentrated in the technology sector.
“Communications and consumer defensive firms scored the highest in terms of pure exposure to the AI theme. Magnificent Seven firms Nvidia and Microsoft make our list of most-exposed firms to AI, but they are not at the top of the list. Snowflake and Oracle have the highest exposure score, 4, meaning they are producers of AI technology,” the report said.
Asia-Pacific’s most widely held AI stocks are hardware-focused, with AI chip manufacturing linchpin TSMC appearing in more than half of portfolios.
Meanwhile, several of the most prominent AI pure-play companies – including Anthropic, OpenAI and xAI – remain privately held.
