In case you haven’t noticed, the bulls have been in full control on Wall Street for more than two years. Last year, the iconic Dow Jones Industrial Average, benchmark S&P 500, and innovation-inspired Nasdaq Composite respectively gained 13%, 23%, and 29%, with all three indexes hitting numerous record-closing highs.
There’s a lengthy list of catalysts behind this persistent rally in equities, which includes better-than-expected corporate earnings, aggressive share buybacks by Wall Street’s most-influential businesses, Donald Trump’s November victory, a resilient U.S. economy, and stock-split euphoria.
But if there’s one factor above all others that’s been fueling this bull market, it’s the artificial intelligence (AI) revolution.
Image source: Getty Images.
Artificial intelligence is a nearly $16 trillion addressable market
The reason professional and everyday investors are so excited about AI is because of its otherworldly potential and reach. Software and systems empowered with AI have the ability to become more proficient at their assigned tasks and can potentially learn new skills, all without the aid of human intervention. This capacity to reason, learn, act, and evolve gives AI utility in almost every industry around the globe.
In Sizing the Prize, the analysts at PwC forecast that AI would, through productivity improvements and consumption-side effects, add $15.7 trillion to the global economy by the turn of the decade. On a percentage basis, we’re talking about a 26% increase in worldwide gross domestic product come 2030 because of this game-changing technology.
Semiconductor colossus Nvidia (NVDA 3.10%) has led the way, with its graphics processing units (GPUs) serving as the brains of high-compute data centers. Nvidia’s Hopper (H100) chip and successor Blackwell GPU architecture are allowing AI software and systems to make split-second decisions, and helping businesses build/train large language models and run generative AI solutions.
Excitement is also building regarding the practical applications of AI. Moving beyond hardware, attention has turned to the likes of Amazon (AMZN 2.39%), Microsoft (MSFT 1.05%), and Alphabet (GOOGL 1.60%) (GOOG 1.62%), which are, in this order, No’s 1 through 3 in terms of cloud infrastructure service platform market share with Amazon Web Services, Azure, and Google Cloud. All three platforms are leaning on generative AI solutions to help their customers.
While the sky would seem to be the limit for artificial intelligence, some of Wall Street’s most-prominent billionaire investors would beg to differ.
Billionaire money managers appear to be sounding a deafening warning on AI stocks
Thanks to Form 13F filings with the Securities and Exchange Commission, investors have the ability to look under the proverbial hood and see which stocks Wall Street’s top money managers have been buying and selling. A 13F is a required filing no later than 45 days following the end to a quarter for institutional investors managing at least $100 million in assets.
Based on the latest round of Form 13Fs, five billionaire asset managers were sellers of Wall Street’s leading AI stocks (total shares sold in parenthesis):
- Dan Loeb of Third Point: Alphabet, Class A (GOOGL)(1,980,000 shares), Amazon (1,400,000 shares), Apple (AAPL 0.75%)(1,020,000 shares), Microsoft (710,000 shares), and Meta Platforms (META 0.24%)(555,000 shares)
- Warren Buffett of Berkshire Hathaway: Apple (100,000,000 shares)
- Terry Smith of Fundsmith: Microsoft (240,340 shares)
- Stanley Druckenmiller of Duquesne Family Office: Microsoft (357,395 shares), Nvidia (214,060 shares), and Apple (24,400 shares)
- Philippe Laffont of Coatue Management: Nvidia (3,616,286 shares) and Meta Platforms (488,068 shares)
The “why?” behind this selling activity in Wall Street’s leading AI stocks likely has to do with two factors.
Image source: Getty Images.
History is an undefeated headwind that AI stocks will have to contend with
The first undeniable headwind the rise of AI is going to have to deal with is history -- and history has a flawless track record when it comes to next-big-thing innovations over the last three decades.
For instance, the advent and proliferation of the internet roughly 30 years ago positively impacted the growth trajectory for corporate America by opening new sales and marketing channels. But this success wasn’t achieved without the technology needing many years to mature. The true rise of the internet only occurred after the bursting of the dot-com bubble.
Since the internet took Wall Street by storm, we’ve witnessed a number of game-changing innovations succumb to early-stage bubbles, including genome decoding, nanotechnology, 3D printing, blockchain technology, and the metaverse.
This isn’t to say that artificial intelligence can’t be wildly successful over the long run. There are plenty of viable uses for this technology in most industries around the globe. The problem is that most businesses don’t yet understand how to generate a positive return on their AI investments, or how best to deploy this game-changing technology.
Every next-big-thing innovation needs time to mature, and it’s unlikely that AI will be the exception. If history proves accurate and the AI bubble bursts at some point in the not-too-distant future, this selling activity by billionaire money managers will be viewed as prescient.
The stock market is historically pricey (and billionaire investors have taken notice)
The other reason billionaire investors may be heading for the exit with prominent AI stocks is because the stock market is historically pricey.
As of the closing bell on Jan. 17, the S&P 500’s Shiller price-to-earnings (P/E) ratio, which is also known as the cyclically-adjusted P/E Ratio (CAPE Ratio), stood at 38.11. The Shiller P/E is based on average inflation-adjusted earnings from the prior 10 years, and it’s at the third highest reading during a continuous bull market spanning 154 years.
S&P 500 Shiller CAPE Ratio data by YCharts.
There have been six occurrences since January 1871 where the S&P 500’s Shiller P/E has surpassed 30 during a bull market, and the five previous instances all saw the Dow, S&P 500, and/or Nasdaq Composite lose 20% or more of their respective value.
Many of these leading AI stocks have been pushing the envelope of their historic valuation ranges. While some are still fundamentally attractive, such as Alphabet and Meta Platforms, others need everything to go right to justify their premiums.
As an example, Nvidia surpassed a price-to-sales (P/S) ratio of more than 40 last summer. This is a level where market leaders during the dot-com era, including Amazon, petered out before losing most of their value.
Likewise, Apple’s trailing-12-month P/E ratio recently topped 42, which is its highest point in more than 15 years. It’s an exceptionally pricey multiple for a company whose physical device sales, including iPhone, have stagnated for two years.
Between history and valuation, billionaire money managers have compelling reasons to believe leading AI stocks could struggle in the new year.
