Investment Firm Warns: AI Stock Market Rally Driven by FOMO, Unsustainable
Investors who have recently shifted from the volatile cryptocurrency market to artificial intelligence (AI) stocks may need to reconsider their investments. A prominent investment firm has issued a warning, stating that the current stock market rally fueled by AI hype is primarily driven by a fear of missing out (FOMO) and is unlikely to be sustained in the long run.
James Demmert, Chief Investment Officer at Main Street Research, believes that the surge in AI stocks is a temporary phenomenon fueled by irrational exuberance rather than fundamental factors. Demmert has observed that both retail and institutional investors are succumbing to FOMO, leading to the market’s upward trajectory. However, he warns that the current momentum is not sustainable, especially in light of the possibility of mixed earnings reports and a potential interest rate hike by the Federal Reserve.
The markets’ unusually calm nature is an indication of the euphoria driven by FOMO. Despite volatility being at record lows, investors have become increasingly bullish. Demmert advises caution, suggesting that investors hold off on chasing stocks at these levels. Instead, he believes that patience and utilizing any market corrections as buying opportunities would be a wiser approach.
The upcoming policy meeting of the Federal Reserve on March 22 could potentially dampen the party. Market expectations are leaning towards another 25 basis point increase in interest rates, pushing the Fed funds rate to levels not seen since 2001, at around 5.25-5.5%. A more hawkish stance from the Fed aims to temper excessive excitement that may hinder the goal of tightening financial conditions, consequently unsettling investors.
Furthermore, the current earnings reports from major tech companies such as Alphabet, Meta, and Microsoft may exacerbate the instability in the AI sector. Some of these firms have already issued cautious outlooks, causing concerns that additional weakness could emerge.
Demmert is not alone in his skepticism. Emad Mostaque, CEO of AI firm Stability AI, echoes the warning, cautioning that the hype surrounding AI might result in an even larger dot AI bubble than the dot-com bubble witnessed in the 1990s. Although the long-term potential of AI is evident, excessive hype tends to drive stock prices beyond reasonable levels. Mostaque emphasizes that safely integrating AI into mission-critical systems will take more time than some believe.
Nevertheless, the impact of AI remains significant. Reports indicate that generative AI alone may contribute up to $4.4 trillion annually to the global economy. Moreover, the entire AI industry could attain a value of $15.7 trillion by 2030. These staggering numbers may contribute to the current exuberance among investors. However, it is important to remember that irrationality seldom ends well in the markets.
Taking heed of alerts from rational analysts and industry experts might help investors navigate the dot AI tsunami. Demmert suggests that the train has only just left the station, and it may be beneficial to wait for a potential stock correction before entering the market.
Investors must evaluate the situation critically and make informed decisions amid the current AI hype. As the market continues to evolve, it is critical to adopt a measured and objective approach to maximize potential opportunities while minimizing risks.
