Wall Street guru David Rosenberg assumes that the stock market's rally, fronted by the artificial intelligence frenzy, is similar to the dot-com era boom that occurred in the early 2000s. Rosenberg believes in AI long term, but "the current environment is taking on a mania of sorts." He also warns that this might also be a sign of a looming recession.
"This type of corporate behavior is not too different from what took place in the dot-com bubble, with company after company satisfying investors' appetite for news on how it plans to incorporate the internet into its business - or boosting stocks just because they added '.com' to the name," Rosenberg stressed. Back then, the outcome was disastrous for investors.
Other red flags are the stability of the S&P 500 index, a tight US labor market, a sharp increase in the Fed's key rate, and a prolonged inversion of the yield curve. Besides, traders have been betting on a soft landing for a long time. If this scenario does not come true, it could also be the reason for a dramatic fall in stocks.
"I think that we have a price bubble. If you look at the six-month chart of the Nasdaq 100, you have to be blind not to see that. This actually looks very weird, and it's way overextended," he pinpointed. Therefore, the AI bubble may burst one day, causing havoc in stock markets. The current hype around AI makes such a scenario extremely likely. Such situations are the fertile ground for market bubbles, which after a while usually burst, he added.
The investor is concerned about the excessive optimism that boosts shares of companies pioneering in the AL scene, e.g. chipmaker Nvidia's blockbuster earnings. Its shares have tripled in price, while its market capitalization has reached $1 trillion.
