There’s a theory going around that many US tech stocks have been driven higher in a frenzy of speculation about artificial intelligence, or AI as it’s known for short.
And some financial analysts are putting forward the suggestion that it’s become yet another speculative bubble ripe for the popping.
That means to them that some of the big-name US stocks caught up in the rising tide could be in for an imminent plunge.
The UK market still looks cheap
My guess is they’re talking about names such as Microsoft, Nvidia and others. And they may be right or wrong with their theory.
But possible overvaluation in the US market isn’t reflected much here in London-listed stocks. So I don’t reckon long-term investors focused on UK shares need worry too much.
However, any weakness in the US stock market often acts as a drag on UK shares. So we could see some shorter-term volatility over here if US tech stocks do crash.
And I’d aim to use any such weakness as a buying opportunity.
For example, there are some UK stocks that have exposure to potential upside from advancing AI technology. I’m thinking of names such as Relx and Kainos to begin with.
But there might be others too.
And if predictions prove to be correct about the likelihood that AI may revolutionise so many industries, a much broader range of UK stocks could benefit.
Of course, I’m not the only investor who’s bullish on the ongoing potential of AI to drive market gains in the years ahead.
Big bubble or little bubble?
In June 2023, US firm SkyBridge Capital’s founder Anthony Scaramucci said AI stocks are likely in a bubble but long-term investors “should probably own some”.
Scaramucci went on to explain that markets tend to move in boom and bust cycles. But that doesn’t mean AI is now off the agenda just because speculation might have driven stocks higher.
And those comments suggest that any pullback in US tech stock prices could be worth exploring. It may be an opportunity to add positions from the sector to a diversified portfolio.
Meanwhile, analysts at Bank of America recently categorised the rise of US AI stocks as a “baby bubble.”
And head of equity strategy Wells Fargo Securities, Chris Harvey, argued that valuations and earnings expectations for AI are realistic. Unlike the early internet companies in the late 1990s, there are immediate commercial uses for AI tech.
Personally though, I’ve never been that successful aiming to invest in themes based on opinions. Sometimes relying too much on thematic analysis has led me to buy and hold dead-end or losing stocks.
And judging by the lacklustre performance of many investment trusts and funds, the stock-pickers managing them could be having similar experiences.
My preference is to judge each individual business by its quality, value and business momentum characteristics.
The method isn’t perfect. But I find the approach tends to get me into some of the best-performing stocks anyway. And sometimes into the theme of the day almost by accident.
