‘High valuations alone rarely end a rally’ say UBS analysts on AI stock surge
The rapid rise in the share prices of AI-adjacent stocks could continue well into 2026, analysts at one of Europe’s top banks have said.
Valuations of top tech stocks have been running hot since the start of the year as investors rushed to build a stake in the burgeoning technology, with the US S&P 500 index trading at 23 times forward earnings, near the top of its historical range.
However, that remains well below the index’s dotcom bubble peak, in which it achieved multiples as high as 27 times in 2000, before abruptly tumbling to as low as 15 times.
“History suggests that high valuations alone rarely end a rally,” analysts said.
“For example, warnings about “irrational exuberance” in 1996 came years before the Nasdaq peak, and concerns about a “QE bubble” in 2013 were followed by further gains.
“Elevated valuations can point to more modest long-term returns and the S&P 500 may struggle to match its 9.7% average annual return of the past two decades. However, markets can continue to advance as long as profit growth and liquidity remain strong.”
AI bubble fears
A host of analysts and economists, including at the IMF, have warned that frothy valuations of tech businesses could soon see a sharp correction, sending shockwaves through equity markets.
Some investors have cut back their exposure to the biggest listed US tech firms in search of greater upside elsewhere.
London-listed Polar Capital Technology Trust says it is all-in on AI, but at the same time, is underweight the Mag 7 technology companies. The company says non-Mag 7 businesses stand to gain more from the AI boom, and that they “prefer to own companies that are recipients of AI capex” rather than those that are deploying it.
In its results last week the firm said “many commentators appear to be conflating Big Tech with AI which we believe is, at best, an oversimplification and, at worst, misleading.”
“History demonstrates to me as a long-term tech investor that what new cycles ultimately do is challenge the value of the incumbency – and that’s what we believe is now beginning to play out in markets,” said Polar Capital partner Ben Rogoff.