It’s the question on virtually everyone’s mind as 2025 winds down — have AI stocks formed an investment bubble?
“It’s probably happening,” said personal finance journalist Rob Carrick on an edition of the Canadian Advisor.cast last month. “Whenever you inject massive amounts of hype into a futuristic technology that we can semi-perceive … it’s almost inevitable there’s going to be a bubble.”
Carrick doesn’t believe that this is anything like the dot-com bust — an obvious analogy — but there are plenty of smart people taking profits off the table.
Price-to-earnings ratios are elevated in Canada and the U.S. The S&P/TSX composite index is in the 19-to-20 range on a trailing basis. The S&P 500 is between 27 and 30, depending on the source. The Nasdaq is trading at about 34 times earnings — roughly eight points above its 10-year average.
Yet one theme emerging from the latest round of new-year market forecasts is that AI investment may still be in its early stages.
Franklin Templeton’s Michael Greenberg, head of Americas portfolio management, talked about “the next phase of AI” in a presentation to journalists at the end of November. His view is that companies will realize productivity gains as a result of AI implementations that’ll drive their stock prices to new highs.
This week, we heard from Vanguard.
“The ongoing wave of AI-driven physical investment is expected to be a powerful force,” reads a report from the asset manager that dropped Wednesday. “Our analysis suggests that this investment cycle is still under way, supporting our projection of up to a 60% chance that the U.S. economy will achieve 3% real GDP growth in the coming years.”
Vanguard noted that this call is “materially above most professional and central bank forecasts.”
AI investment “is key to our forecast,” said Joe Davis, global chief economist and head of the investment strategy group at Vanguard on a call with journalists.
Comparisons to railroad technology in the 19th century and personal computers in the 20th century are relevant because each involved “a process of capital deepening,” in which old tech was replaced with new. “That all requires a significant upfront investment,” Davis said.
“We’re about two, three years into the cycle,” he said. “There is more to come.”
This has the potential to benefit more than the Magnificent Seven. Watch for investments in data centres, energy production and other sectors.
While investor optimism is largely priced into tech stock prices, value stocks could benefit from a rise in capital expenditures, at least in the short term. Whether or not AI turns out to be the transformative economic force it’s being hyped as, Vanguard believes value stocks could benefit from the spending.