As US stock indexes chug ever higher, more market watchers are starting to worry. For example, the Chair of the Federal Reserve, Jerome Powell, recently said that share prices are “fairly highly valued“.
You can say that again. The S&P 500 rose 3.5% last month — the index’s strongest September in about 15 years — and its price-to-earnings (P/E) ratio now sits around 30. By historical standards, that’s very high.
Echoes of the past
To some, this all feels like a replay of the dotcom bubble, which finally popped between 2000 and 2002. From peak to trough, the tech-heavy Nasdaq Composite index fell by nearly 77%!
Back then, of course, it was the revolutionary potential of the internet that had investors piling into tech stocks. Now it’s artificial intelligence (AI).
Industrial bubble
Someone who knows a thing or two about the internet and AI is Amazon founder Jeff Bezos. The e-commerce firm’s share price fell from $113 to $6 during the dotcom crash.
At a recent tech event, Bezos labelled today’s AI hype as an “industrial” bubble rather than a financial one. “The ones that are industrial are not nearly as bad, they can even be good,” he said. “Because when the dust settles…society benefits from those inventions.”
In other words, while society will benefit tomorrow, there’s a lot of overinvestment and overvaluation today in AI.
At the same conference, Goldman Sachs CEO David Solomon also cautioned about this: “There will be a reset, there will be a check at some point, there will be a drawdown.”
He doesn’t know when, of course (nobody does). But he warned that a drawdown within the “next 12 to 24 months” wouldn’t surprise him.
Therefore, this might happen next year, which is something investors should bear in mind.
UK stock
Again though, it’s worth stressing that Bezos and Solomon think AI will prove transformative. The Amazon founder said: “The benefits to society from AI are going to be gigantic.”
One area where AI could have a profound impact is in drug discovery. Increasingly powerful machine learning models can analyse vast datasets and identify promising compounds. This should make the whole process dramatically faster and cheaper.
We’re going to have incredible [AI] tools that bring the world of biology — which is very chaotic and constantly changing and diverse and complex — into the world of computer science. And that is going to be profound.
Nvidia CEO Jensen Huang.
Over time, this should benefit AstraZeneca (LSE:AZN). The pharma giant has been leaning heavily into AI for a few years, but as models rapidly improve, its pipeline and profit margins are set to follow.
The good news is that none of this AI potential seems priced in today. AstraZeneca’s stock is trading at 16.7 times next year’s forecast earnings, which isn’t too much higher than the FTSE 100 average.
In the near term, the pharma sector continues to face uncertainty around US drug pricing and tariffs. These issues add risk to the investment case.
But the company looks set to benefit enormously from AI, and this week signed a deal with Algen Biotechnologies to licence its AI-driven gene-editing tech for immune disorder therapies.
Moreover, AstraZeneca is not part of any AI market bubble. As such, I reckon the stock is worth a look for long-term investors.
