Market Insight

The four most dangerous words in investing are: ‘this time it’s different’ Sir John Templeton, 1993.

In January, we spoke about one of the most significant stock market events to ever happen – Nvidia shares lost c.17% of their value in one day, wiping out an astonishing $600 billion of value. This marked the largest single-day dollar loss ever for a US stock. The sharp drop was triggered by news of an upstart Chinese AI company that has produced a more efficient AI learning model, potentially signalling lower demand for Nvidia’s high-end AI computer chips.

Some commentators rushed to declare this the end of a ‘bubble’ in tech stocks. A bubble is typically defined as a period where investors become irrationally confident and vocal about a new and exciting investment opportunity, pushing prices ever higher until reality bites and the investment is quickly and widely sold. The resulting losses are deep and widespread. We have the benefit of observing many historic stock market bubbles to know that sometimes it is safer to step back a little when markets become exuberant, as they tend to be when there is a promised paradigm shift on the horizon. Consider the post-war optimism that drove the Roaring Twenties into the Wall Street Crash of 1929. Similarly, the overconfidence in a new era for 1980s Japan that saw some commercial real estate ultimately decline by 99% in value. Most relevant to today is the DotCom bubble bursting in 2000 – where investors rushed to buy new internet companies with unproven business models, often on the basis of a ‘fear of missing out’ on new technology that promised to change the world – ending in tears for many.

How does the current market compare? Today, investors are encouraged by news of the ever-greater deployment of AI technology in big tech companies like the ‘Magnificent Seven’: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, & Tesla. As a result, these stocks (and others) have enjoyed sky-high valuations of late – the technology sector of the S&P 500 is close to valuation highs not seen since the early 2000s.

With AI, we are certainly facing exciting uncharted territory, but can we say with confidence: “this time, it’s different”?

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This article is provided for information purposes only. All material(s) have been obtained from sources believed to be reliable, but accuracy is not guaranteed. The views and opinions expressed are the views of Fundhouse and are subject to change based on market and other conditions. Fundhouse is the trading name of Fundhouse Bespoke Limited. Fundhouse provides investment management services to professional clients and does not provide financial advice. Importantly, this note does not represent investment advice, and any reader should always speak to their financial adviser before making any investment decisions. Please note that the value of any investment may go down as well as up, and you may lose capital when investing, and the value of your investments may not always increase. Please ensure that you are comfortable bearing financial losses and that you are comfortable taking a long-term investment view of five years or more.