Not All Bubbles Are Created Equally
It can be hard to see the silver lining of massive overinvestments made during mania-like times, but renowned tech investor Fred Wilson once shared:
"Nothing important has ever been built without irrational exuberance."
If that's true, then we may look back decades from now, thankful for the massive investments being made in AI right now, with a similar appreciation that we have today for the internet pioneers of the past.
What makes this look different that the Dot-Com Bubble: Corporate Earnings
The companies leading the charge in AI, so far, actually have the fundamentals to back it up. JP Morgan's Michael Cembalest shared the following in a new research piece this week:
AI-related stocks have accounted for 75% of S&P 500 returns, 80% of earnings growth, and 90% of capital spending growth since ChatGPT launched in November 2022.
These companies are spending like drunken sailors, but they can all afford the booze. And if you're invested in the market, you already have plenty of exposure to these gigantic tech stocks—which means their performance matters to your portfolio whether you realize it or not.
Just because this feels like some of history’s biggest bubbles doesn’t make it any easier to handicap.
So what do we do with all this?
I understand why many investors are worried about the prospects of a bubble. When they burst, it tends to be painful.
But here's the reality: the truth is no one is going to predict when the current cycle comes to an end. And if someone does, it will be pure luck that they'll be chasing for the rest of their career.
Just because this feels like some of history's biggest bubbles doesn't make it any easier to handicap. Calling the top is next to impossible because emotions matter more than numbers in the short-run. People are driven by narratives in an innovation boom, not data.
Every cycle comes to an end eventually, but you're far better off preparing for a wide range of results rather than predicting when the market will turn. Investing would be a whole lot easier if you knew when the tops and bottoms would occur in advance.
In lieu of a crystal ball, I diversify and invest for the long-run.