Nvidia beat market expectations, but it may galvanise concerns on AI spending.
- Nvidia reported a 62% rise in revenues for the year, beating consensus forecasts.
- 45% of fund managers consider an AI bubble to be the largest “tail risk” for markets.
- Billionaire Paypal founder Peter Thiel sold his entire $100m stake in Nvidia ahead of its results.
Nvidia’s results may have prolonged the AI party, but fund managers are increasingly nervous over whether its strong run can be sustained. The Bank of America Fund Manager Survey showed a net 20% of fund managers thought companies were over-spending on the new technology. Strong chip demand may confirm those fears.
This is the first time a majority of fund managers has expressed concern on AI spending. Nvidia reported a 62% rise in revenues for the year, beating consensus forecasts. While robust demand for chips has been taken as a sign that the underlying AI story may still be intact, it supports the view that companies could be spending too much. In particular, Oracle has been in the spotlight, adding to its debt pile in a race to catch up on AI.
The Bank of America survey showed more than half the fund managers surveyed believed AI stocks were already in a bubble. 45% consider it to be the largest “tail risk” for markets and the global economy, a sharp increase from 33% last month. This nervousness comes in a spite of a generally positive view on risk, with cash levels decreasing and overall equity allocations rising.
Cracks have started to appear over the last week. The CNBC Mag7 index has dropped 1.2% over the past five days trading. Some high profile investors have started to back away from the sector. For example, a filing with US regulator the SEC showed billionaire PayPal founder Peter Thiel sold his entire $100m stake in Nvidia ahead of its results. SoftBank has also sold its stake in Nvidia, for $5.8bn.
This is a significant dilemma for investors. There are plenty of amber signals on AI: high spending, price insensitive buyers, lofty valuations, but, as James Klempster, deputy head of multi-asset at Liontrust, says: “It’s not often a bubble if everyone is saying it’s a bubble.” Their team remain underweight the US and is not bullish on the AI trend, but he admits it could go on for longer than people expect.
Market bull runs can often endure, even if there are well-founded concerns. Often it takes more than simple overvaluation to put an end to the party, particularly when – as in the case of Nvidia – the earnings are still compelling. That said, it doesn’t mean that share prices can’t decelerate and that there aren’t opportunities with greater growth potential elsewhere.
