Apostle’s Harrison Lane’s comments follow a Wall Street wipeout in the US with US$500 billion ($770 billion) erased from top technology stocks on Tuesday 4 November.
“US markets are showing renewed signs of nervousness, with the NASDAQ 100 falling 2.1 per cent [on Tuesday],” Lane said in a note to InvestorDaily.
The S&P 500 declined 1.17 per cent and Dow shed 0.53 per cent, while the volatility index rose to 10.66 per cent.
“Markets have traded sideways in recent weeks, suggesting a degree of investor uncertainty rather than decisive de-risking. While we have not yet seen a clear catalyst for a broader unwind, sentiment is fragile, and we remain cautious heading into year-end.”
With technology firms reporting their Q3 earnings, even those companies which reported positive guidance were still hit with share price falls. It comes amid the ongoing US shutdown - now officially the longest in history - which has halted the flow of key economic data from the US government and meant investors are much more alert to the health of US corporate earnings.
It was a sea of red for technology firms on the stockmarket as artificial intelligence valuation concerns rocked investor sentiment, leading experts to consider whether the AI trade has peaked.
Software firm Palantir’s shares shed around 8 per cent, despite posting record quarterly results that blew past analysts’ estimates and strong future guidance, fuelled by growth in its AI business. Meanwhile, Oracle and Nvidia dropped almost 4 per cent and AMD slid more than 3 per cent despite better-than-expected results.
“Some market commentators are warning of a potential pullback in equities as signs emerge that the strength of the AI sector may be losing momentum. While the US earnings season has so far been solid, sentiment is more unsettled than in the previous quarter,” Lane said.
“Investors are increasingly aware of stretched valuations, growing discussion of a potential “AI bubble”, and the likelihood of less supportive monetary policy ahead.”
ETF Shares CIO David Tuckwell said the 2008 Global Financial Crisis had created a permanent cynicism about the financial services industry.
“People are too willing to call things a bubble these days,” Tuckwell told InvestorDaily.
“My own view is that this pullback is healthy as it removes the 'weak longs' from the ledger. That is, people buying into AI stocks with weak conviction that aren't going to have the discipline to buy-and-hold through difficult volatile periods.”
He believes there is currently a rift in markets on AI.
“Private markets - your VCs, PEs, etc - which are more sophisticated and driven by richer participants, are going all in on AI. They see the huge government support from President Trump and the wartime-style mobilisation across the private sector around this theme,” Tuckwell said.
“They think this is a once in a lifetime investment opportunity that's going to change the economy forever and are deploying huge capital rapidly.”
In contrast, public markets are worried that the theme is getting too hot and frothy and there might be a bubble brewing, according to Tuckwell.
“The pullback has been localised to the public markets and focused on these highly desired AI companies like Palantir and Nvidia, which traders are thinking have run too hot.”
Betashares put the pullback down to concerns around the "circularity" occurring in deals between mega-cap tech companies, extended valuations, and a repricing in rate cut expectations.
“Overall, the sell-off was broad based, impacting tech stocks, gold and bitcoin, as investors sought sources of liquidity,” investment strategist Hugh Lam said.
Adding to the Tuesday sell-off were comments from Goldman Sachs and Morgan Stanley CEOs David Solomon and Ted Pick, who warned of a 10 to 20 per cent correction in equity markets over the next 1-2 years.
Speaking at a Global Financial Leaders Investment Summit in Hong Kong, they said periodic pullbacks are welcome and a normal part of functioning investment markets, indicating healthy developments rather than a crisis.
“Much of the move was a reaction to an investment summit where the banking chiefs of major US banks hypothesised that equity markets could experience a double-digit selloff,” Lam said.
Lam said it’s natural to see some short-term pullbacks, particularly given how well the S&P 500 has performed since the lows of Liberation Day.
“Looking forward, the main anchors we are looking for are earnings revisions, and US unemployment data, where there has so far not been any signs of labour market weakness. The sustainability of AI capex spending also remains a longer-term question, however is unlikely to impact earnings this year in our view.”
“Additionally, certain themes such as global defence and cybersecurity have resonated well with investors this year; largely a reflection of geopolitical shifts, as the major economic powerhouses of the world engage in trade talks.”
