AI stock rally may be driven by fear of missing out, but strategists say hold tight

AI-related equity valuations may be driven by fearfulness of missing out, known arsenic FOMO — but now's not the clip to get acold feet, according to strategists.

Global equities are astatine persistent highs, the European Central Bank said successful its Financial Stability Review on Wednesday. At the aforesaid time, concentration among a tiny radical of interconnected U.S. hyperscalers has besides intensified, making the marketplace susceptible to crisp adjustments, it warned.  

Hyperscalers typically notation to AI-related exertion names such arsenic Nvidia, Alphabet, Microsoft and Meta.

"Current marketplace pricing does not look to bespeak persistently elevated vulnerabilities and uncertainties," the reappraisal said.

Investors whitethorn beryllium driven by "optimism that process risks volition not materialise," but moves could also "reflect fears of missing retired on a continued rally, arsenic markets person proved to beryllium resilient to recent shocks," it added. 

Strategists noted immoderate FOMO successful the marketplace but judge determination is inactive existent worth successful immoderate AI plays.

The ECB's reappraisal is designed to item imaginable risks to fiscal stability, Julien Lafargue, main marketplace strategist astatine Barclays Private Bank and Wealth Management pointed out, "even if the probability of those risks materialising is low."

Valuations are "not cheap" but companies are delivering connected growth, helium told CNBC, calling for differentiation crossed circumstantial sectors. The bigger hazard lies with companies benefitting from an accrued stock terms erstwhile they person not yet generated earnings, Lafargue said, pointing to quantum computing-related companies.

"In these cases, capitalist positioning seems driven much by optimism than by tangible results," helium said.

"In short, portion immoderate valuations whitethorn beryllium driven by 'FOMO' others are backed by bonzer net maturation and, arsenic such, differentiation is key," helium added.

The ECB's reappraisal follows a rollercoaster few weeks for planetary stocks amid Nvidia earnings, which buoyed an different deflating equities marketplace that had been pressured by circular dealmaking, indebtedness issuances and precocious valuations. The net initially sent the tech giant's banal soaring but past rapidly reversed.  

The marketplace is spilt connected whether determination is an AI-fueled concern bubble, with 1 capitalist going truthful acold to accidental that there is an 'everything bubble.' Bridgewater Associates founder Ray Dalio expressed concern, Blackrock's Larry Fink pushed backmost connected the request for ample checks to beryllium chopped for AI infrastructure, and Ark Invest's Cathie Wood rejected the idea of a bubble.

In contrast, the ECB is the latest successful a drawstring of cardinal backs to urge caution, with earlier warnings coming from the Bank of England and International Monetary Fund.

The European cardinal slope did not measurement successful connected whether it thinks a bubble has emerged but noted parallels with the dot-com roar and bust. "But the existent precocious valuations appear to beryllium underpinned by exceptionally robust net performance," it added.

Still, "market sentiment could displacement abruptly, not lone if maturation prospects deteriorate but besides if exertion assemblage net – particularly those of companies associated with artificial quality – fail to deliver connected expectations," Luis de Guindos, the ECB's vice president, wrote successful the report. 

He noted that non-bank fiscal intermediaries successful the euro country would apt look losses successful specified a script due to the fact that of their concentrated vulnerability to the U.S. "Liquidity mismatches of open-ended concern funds, pockets of precocious leverage among hedge funds and opacity successful backstage markets could amplify marketplace stress," De Guindos added. 

The 'Magnificent 7' stocks — Alphabet, Amazon, Apple, Tesla, Meta, Microsoft, and Nvidia — are presently up 24% year-to-date. Crypto has been volatile, experiencing a large merchantability off this month that deed Bitcoin and Ethereum successful particular. 

"Ultimately, the ECB has a point," said Michael Field, main equity strategist astatine Morningstar. The Magnificent 7 stocks relationship for 40% of the Morningstar US index, which is simply a risky level of concentration, the strategist said, adding "the information that each 7 stocks person ample vulnerability to the AI taxable brings connected different level of risk."

Still, the steadfast sees an upside successful astir of those large names. Tesla, however, is "more than 50% overvalued," Field said.

"It's hard to contradict that the valuations of different stocks exposed to the AI taxable aren't stretched, arsenic per the ECB's comment. U.K. darling ARM Holdings trades astatine astir 90 times our estimation for 2026 earnings, treble the aggregate of Nvidia. This is surely a risk," helium added.

"So, should we commencement panicking present and selling the market? No is the answer. But it's important to beryllium alert of the inherent hazard and not beryllium swept successful the FOMO as stock prices proceed to climb," Field said.

For Wedbush's Dan Ives, markets are not successful a bubble; this is twelvemonth 3 of an eight-to-10-year buildout for an AI Revolution, helium told CNBC. He sees 2 further years near successful "this tech bull market" earlier a dilatory down — not a burst.

"It's 10:30 p.m. successful the AI enactment and it goes until 4 am, and the ECB volition beryllium watching done the windows from the outside," Ives said. 

"Europe is successful a clip capsule astir tech innovation on with crypto and it's been a frustrating clip for galore tech investors and entrepreneurs successful the portion we person spoken to done our global travels," he added.