Investors’ enthusiasm for artificial intelligence (AI) equities remains undaunted. Consider the following point courtesy of Wall Street Journal financial columnist James Mackintosh.
In May, Apple (AAPL), Alphabet (GOOG), Microsoft (MSFT) and Nvidia (NVDA) added more market value than the rest of the S&P 500 combined. That speaks to high levels of market concentration. But that trend has also been good news for investors owning the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM). Those funds allocate approximately 30% of their portfolios, which are identical, to that quartet of stocks.
AI ebullience is still mostly confined to a smaller number of stocks. So questions are reappearing about concentration levels in supposedly broad indexes. And bubble fears are increasing, too. For example, some naysayers assert Nvidia is trading at valuations reminiscent of the 2000 tech bubble. On the other hand, some market observers believe those bubble fears aren’t all they’re purported to be.
Assessing Specter of AI Bubble
For investors considering AI-heavy assets such as QQQ and QQQM, bubble talk shouldn’t be dismissed. But it also pays to examine the details.
“One scenario: Demand for Nvidia’s high-end graphics processing units falls because AI is overhyped and has yet to live up to its promise. In other words, demand will turn out to be a bubble and that bubble then bursts—as bubbles, by definition, always do,” noted James Pethokoukis of the American Enterprise Institute.
Obviously, bubbles aren’t kind. Whether one arrives for Nvidia or the AI lot at large, it’d be negative. On the other hand, there are no guarantees of that happening. And as the tech bubble of 2000 proved, bubbles don’t eliminate the technologies in question.
“Investors get excited and shovel way too much money into them. In the meantime, however, an enormous amount of money has flowed into the new technology, allowing it to more fully develop,” observed Pethokoukis.
Translation: the AI bubble could burst, but the technology isn’t going anywhere. The staying power of AI is what should be appealing to long-term investors considering funds like QQQ and QQQM. Many of the investments made today and in recent years by QQQ/QQQM member firms ensure AI will be relevant and potentially rewarding for years to come.
“Even if the AI boom eventually goes bust, the flood of investment now might end up accelerating progress in key AI technologies, building lasting infrastructure such as data centers for future innovation, fueling experiments in AI applications across industries, and attracting talent to the field. While many companies might fail, the overall result could be a significant acceleration of AI capabilities that entrepreneurs will eventually put to productive use,” concluded Pethokoukis.
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