‘AI-Driven Bubble’ May Burst And Drag Down Stock Market, JPMorgan Says - Forbes

Topline

Strategists at JPMorgan Chase warned Monday that stocks’ broad rally fueled by artificial intelligence intrigue could soon come tumbling down, as the world’s largest bank throws cold water on the AI frenzy which has sent stocks surging despite not yet materially impacting most corporate bottom lines.

than concrete evidence of AI-driven earnings growth.

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Key Facts

In a note to clients, a group led by JPMorgan’s chief markets strategist Marko Kolanovic laid out their case for a bearish outlook for equities even as historically strong sentiments among investors prevail.

The rally, led by the largest technology companies, is “indicative” of “an AI-driven bubble” as the hype surrounding the technology “was triggered by the “popularization of chatbots that often fail in basic questions” rather than concrete evidence of AI-powered earnings growth, according to the bank.

JPMorgan predicted there will be broad market declines as the market re-prices in the lingering impact of higher interest rates, an “erosion” of personal savings and a “deeply troubling” geopolitical backdrop—factors which drove stocks to their worst year in more than a decade in 2022.

Contra

The S&P 500 is up nearly 20% this year thanks in large part to $1.9 trillion worth of gains among top AI players like Nvidia, Alphabet and Microsoft. The narrow concentration of the gains could justify a broader rally among stocks left out of the multiple explosion party so far, Goldman Sachs analysts led by David Kostin laid out in a Friday note. If the price-to-earnings multiple of the 493 S&P constituents not named Alphabet, Apple, Amazon Microsoft Meta, Nvidia or Tesla raises just from its current level of 17x to 19x, the S&P will rally to an all-time high, Goldman forecasted.

Crucial Quote

Now’s a “good entry point” for commodities as the asset class prices in “by far the highest risk of recession and stand out as under-valued, under-owned, and backed by compelling fundamentals and technicals,” Kolanovic wrote.

What To Watch For

A glut of economic and financial news is on deck this week. The Federal Reserve will reveal Wednesday whether it will further raise interest rates, while Alphabet and Microsoft’s Tuesday afternoon earnings reports kick off the primetime of mega-cap tech earnings season.