The big question in markets is simple: what next for stocks that have surged on the euphoria of artificial intelligence (AI) breakthroughs? And how might this affect the broader direction of world stock markets?
Key takeaways
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Stocks related to AI have seen significant increases however, there are concerns about high valuations and uncertainties, particularly regarding sales in China.
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Few doubt that AI will revolutionise many aspects of daily life, but that doesn’t mean we know exactly how, and when, that change will play out.
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AI stocks may be overvalued and could be part of a speculative bubble, similar to past market phenomena like the dotcom boom.
Results for Nvidia, the pioneering maker of microchips that are driving the AI revolution, were the latest bellwether. Its shares had gained 35% so far in 2025 ahead of the update. Despite solid results, the stock fell 3% in after-hours trading. Uncertainty remains over sales of Nvidia’s AI chips in China. The company reached an unusual deal with the US government to share 15% of revenue from sales in China but the sales impact is unclear. Bloomberg called it a ‘tepid’ revenue forecast.
Nvidia is the poster child for the AI revolution but many other of the world’s biggest companies have rallied on AI hopes — and possibly hype. Many are members of the ‘Magnificent Seven’ (Mag 7) club. Some are succeeding in developing powerful generative AI tools, capable of creating original content such as text, images, music, and code.
Microsoft, owner of generative AI tools ChatGPT and Co-pilot, has seen its shares rise 20% this year. Facebook-owner Meta, with shares up 28% in 2025, is deploying AI to transform its ad revenues. Amazon has Inferentia and Trainium processors and is using AI in its cloud computing operation. It shares are only up 4% this year, largely due to the impact of tariffs on the ecommerce side of the business. Apple is behind peers on generative AI, though it has recently announced Apple Intelligence. It’s worth noting that AI infrastructure company Broadcom is now the world’s sixth largest stock.
The rally in these stocks has left many on historically high valuations. Nvidia, for example, trades on a forward 2025 price/earnings ratio of 42, according to Factset data.
Investors should first consider their exposure to the Mag 7 and to Nvidia, the world’s most valuable company. Nvidia made up 5.7% of the MSCI World Index — the basis for many global tracker funds — as of 31 July.
Top 10 constituents for the MSCI World Index
| Company | Index weighting (%) | Sector |
|---|---|---|
| Nvidia | 5.7 | Info tech |
| Microsoft | 4.9 | Info tech |
| Apple | 4.1 | Info tech |
| Amazon | 2.9 | Consumer discretionary |
| Meta | 2.2 | Comm services |
| Broadcom | 1.7 | Info tech |
| Alphabet A | 1.5 | Comm services |
| Alphabet C | 1.3 | Comm services |
| Tesla | 1.2 | Consumer discretionary |
| JPMorgan | 1.1 | Financials |
| Top 10 total | 26.6 |
Source: MSCI - MSCI World Index 31 July, 2025
Bull points
Few doubt that AI will revolutionise many aspects of daily life, but that doesn’t mean we know exactly how, and when, that change will play out.
Here, we set out some of the bull points:
- AI may revolutionise daily life and reshape the future of work, with potential to boost productivity and efficiency across industries. Earlier this month, Morgan Stanley estimated that AI adoption could deliver US$920 billion a year in benefits, creating US$13–16 trillion in value for S&P 500 companies.
- Valuations, while high, are lower than for stock market bubbles of the past, particularly the dotcom boom of 1999-2000.
- Earnings for Nvidia, Broadcom and peers are forecast to grow at a pace that justifies the higher valuations, driven by surging demand for advanced chips and cloud infrastructure.
Bear points
- AI stocks are overvalued. Jeremy Grantham, co-founder of the contrarian investment house GMO, says AI is a ‘bubble within a bubble’; he built his reputation for issuing warnings ahead of the dotcom crash, Even Sam Altman, founder of OpenAI, has warned that investors are ‘overexcited’ and many are likely to ‘get burnt’.
- The broader benefits from AI are overplayed. Last week, research from MIT (Massachusetts Institute of Technology) found 95% of AI corporate initiatives had delivered little or no financial benefit so far, highlighting uncertainty about commercial impact.
- Regulatory risks remain. Governments and regulators could curb AI progress if certain developments are viewed as detrimental to society.
What are the comparisons with the past?
The obvious comparison with today’s AI rally is the dotcom boom. Investors piled into a narrow set of companies promising to reinvent the world. Many were loss-making, built on hope rather than cashflow. When the bubble burst, the Nasdaq lost three-quarters of its value. Yet Amazon and Google survived and thrived — proof the long-term trend was real, even if early valuations weren’t.
One key difference today is valuations. Nvidia trades on a forward price/earnings (P/E) of 42, supported by robust profitability and demand for its AI chips. By contrast, Cisco during the 2000 bubble had a P/E of 201 at the peak.1
Another parallel is the ‘Nifty Fifty’ — the supposedly ‘can’t lose’ blue-chips of the 1970s. Investors assumed you could pay any price for companies like Coca-Cola or IBM. They were right about the companies’ quality, but wrong about the prices. For a decade, those shares went largely nowhere. The railroad boom and bust of the Victorian era is also often cited.
AI is likely to be as transformative as the internet, the computer, trains or even electricity. The question is not whether it matters, but whether today’s winners justify their share prices. History suggests that in every great innovation cycle, investors get carried away.
Which stock market sectors might benefit if AI enthusiasm faltered?
If the froth comes off AI, investors may rediscover the virtues of dependable sectors.
- Consumer staples and utilities deliver earnings in good times and bad.
- Healthcare has demographic tailwinds and trades on relatively low valuations.
- Energy and financials could revive, offering strong cashflow, value, and dividends.
While the AI revolution offers some exciting opportunities, it's important to remember the lessons from past market crazes: betting big on companies with sky-high valuations can be risky, especially when the future is so uncertain. It’s important to remain diversified, rather than putting all your eggs in the AI basket, to not only reduce risk but also keep yourself positioned to benefit from whatever the economy throws your way, making sure your investments are ready for anything.
Source: 1 Financial Times, 8.3.21
