Stay informed with free updates
Simply sign up to the US equities myFT Digest — delivered directly to your inbox.
Investors’ rush into artificial intelligence stocks this year has overplayed the near-term potential of the technology, raising the risks of a “correction” in share prices, asset management powerhouse Vanguard has warned.
Joe Davis, Vanguard’s chief economist, said investors have gone too far in their bets on AI’s potential, even if the technology proves to have similar effects to the personal computer, whose adoption since the 1980s revolutionised productivity and jobs.
The cautious remarks from the world’s second-largest asset manager add to the fierce debate among investors over whether groups that rode the AI wave are overvalued after huge gains in recent months.
“We see roughly 60 to 65 per cent odds that AI is more impactful than the personal computer. The US stock market today is pricing roughly a 90 per cent probability,” said Davis, who leads the $10tn asset manager’s investment strategy group.
Productivity gains from PCs, and optimism about their potential helped fuel a powerful surge in equities prices in the second half of the late 1990s that culminated in the dotcom bubble bursting in 2000.
“From an economic perspective we’re roughly in the year 1992 but from the market valuation perspective, I can make the argument that we’re in 1997,” he added.
Soaring shares of AI-linked groups have been key drivers of a wider rally in Wall Street stocks, which has led the broad S&P 500 index up 27 per cent this year. Nvidia, which makes chips that are essential for AI, has driven roughly a fifth of the S&P 500’s gains, jumping more than 180 per cent.
Other Big Tech companies, which have made big bets on AI, have also rallied, while private groups such as ChatGPT maker OpenAI have secured towering valuations.
Davis warned the companies most closely linked to the AI investment rush might not ultimately end up its biggest beneficiaries, however transformational it proves to be in the years to come.
“Its companies outside of technology that are actually using the technology — hospitals, utilities, financial companies,” he said. “Meanwhile, you have new entrants coming into AI, so the return on investment in AI companies will go down.”
He added: “The irony is that even if the technology actually is transformational, you can still have a correction in the very prices of the stocks that led to the transformation itself.”
Davis cautioned the timing of any pullback was hard to call: “I just don’t know if it’s going to start in 2025,” he said.
