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Business Insider
8 hours ago
- Business
- Business Insider
The 5 arguments against continued dominance for AI stocks
Since November 2022, artificial intelligence stocks have been the place to be in the market. Nvidia is up 761% over that time. Palantir is up 604%. Taiwan Semiconductor has returned 165%. And Microsoft is up 88%. It's been a gold rush. But how long can the AI trade last? Some experts, like Morgan Stanley's Head of Global Research Katy Huberty, have said that we're still in the early innings of the technology and robust returns still lie ahead. Few seem to refute the idea that AI will transform the US economy to some degree and be an eventual boon for profits. But some have urged caution about investing in the theme after such a huge run of outperformance. Irrational exuberance and greed are running rampant, they worry, potentially setting AI stocks up for a spectacular bust somewhere down the line. While the outlook on the technology's role in the economy is bullish, there are some threats to AI's dominance in the stock market. Five of them are detailed below. 1. Valuations Generally speaking, AI stocks are expensive with their prices relative to their earnings over the last 12 months at elevated levels. For example, the iShares Future AI & Tech ETF (ARTY) has an average trailing 12 months PE ratio of 35.2, and the The Technology Select Sector SPDR Fund (XLK) is trading at 36.7 times earnings. Nvidia trades at a 45 PE ratio. By comparison, the S&P 500, which is at historically expensive levels, has a 23.7 PE. While AI stocks may have stronger growth prospects than those in other industries, high valuations mean those prospects are already priced in. If actual earnings performance underwhelms compared to expectation, then the stocks could start to underperform. High valuations tend to weigh on long-term performance. For example, Microsoft traded at 72-times trailing earnings in 2000. While it went on to lead the way in internet technology, it didn't recover its 2000 highs until 2016. 2. AI technology doesn't end up being quite as impactful as investors think AI may make tasks more efficient, but perhaps not to the degree the market thinks, said Jim Covello, head of Global Equity Research at Goldman Sachs, in a June 2024 report. "People generally substantially overestimate what the technology is capable of today. In our experience, even basic summarization tasks often yield illegible and nonsensical results," Covello wrote. "This is not a matter of just some tweaks being required here and there; despite its expensive price tag, the technology is nowhere near where it needs to be in order to be useful for even such basic tasks," he continued. "And I struggle to believe that the technology will ever achieve the cognitive reasoning required to substantially augment or replace human interactions." This could hurt AI firms, which are pumping hundreds of billions into building out AI infrastructure. What if, in the end, the mammoth spending isn't worth it? 3. Current leaders may not remain Another risk is that you end up investing in the wrong stocks altogether. Just because certain stocks are pioneering a technology, doesn't mean that they will continue to do so. The presumption five years ago "would have been that Intel would be the dominant player" in the AI space, Research Affiliates Founder Rob Arnott told BI in November. "Well, Intel is teetering perilously close to irrelevance, and Nvidia wasn't on anyone's radar screen five years ago. So disruptors get disrupted." 4. Rising long-term interest rates As foreign investors start to pull back from US Treasury bonds amid an expanding national debt, and as tariffs and Trump's tax cut bill threaten to boost inflation, long-term Treasury yields are trending upward. When long-end yields go too high, it has historically hurt growth stock performance and brought down valuations. Higher-risk free yields start to attract money, and risky and expensive stocks start to lose their luster. 5. Geopolitical uncertainty One of the key players in AI development is chipmaker Taiwan Semiconductor. If China were to invade Taiwan, as it has threatened, the AI supply chain could be severely interrupted. "The moment conflict starts in the Taiwan Strait, you have to assume that TSMC shuts down very, very quickly regardless of what any of the players decide to do — regardless of whether anyone decides to disrupt the supply chain or destroy this or that or not," said Chris Miller, author "Chip War," in an interview with BI last year. "Taiwan imports a big chunk of its energy and chip factories need energy. And there are a bunch of critical chemicals and materials that are imported into Taiwan, and those would stop," he continued. "What's more, you couldn't get the ships out of Taiwan if there was a shooting war going on. And so your incentive to produce a lot also declines very rapidly if you can't actually sell chips or get them off-island."
Yahoo
12-04-2025
- Business
- Yahoo
Artificial Intelligence: Think Outside the AI Box With This Vanguard ETF
Artificial intelligence (AI) is expanding its use case throughout the economy at a rapid clip. The AI industry responsible for this expansion is something of a battleground, however, and it isn't exactly clear which companies are going to end up as winners and losers over the long makes it tough to know which stocks might be worth investing in to take advantage of the significant growth going on. One way to improve your chances is to buy a small piece of several AI companies through an AI-focused exchange-traded fund (ETF). But there's another lesser-known ETF option that is likely to benefit from AI as well. Here's why it may be worth thinking outside the box when it comes to AI and ETFs. Given how often artificial intelligence is talked about today and how long AI has been around in some form, it is hard to believe that investing in the sector has only been an option for a few years. The technology is rapidly advancing, too, so today's leader can quickly turn into a laggard. It is a very complex space, even though AI can clearly do incredible things. The problem is that buying an AI stock is highly risky given the still early stage of the industry's development. Ford Motor Company and General Motors were big winners in the combustion engine business, but a lot of competitors fell by the wayside before these two industry giants became, well, industry giants. The same thing is likely to happen in AI. One solution is to buy an AI-focused ETF. There are a bunch of choices, including Global X Robotics & Artificial Intelligence ETF (NASDAQ: BOTZ), ROBO Global Robotics and Automation Index ETF (NYSEMKT: ROBO), and iShares Future AI & Tech ETF (NYSEMKT: ARTY). Buying one of these ETFs is a solid option because you get a portfolio of AI-related stocks in one investment. But an AI ETF isn't the only choice you have, if you think a bit more deeply about the technology in question. While it isn't quite clear yet what companies will be the ultimate AI winners, whoever wins will need a lot of electricity to power their AI computers. And that means that electricity providers are set to benefit from a ramp-up in demand, which has been a common theme as utilities discuss earnings. For example, giant U.S. utility NextEra Energy (NYSE: NEE) recently highlighted that demand for energy was projected to increase by 22% in the United States between 2020 and 2040. Only that projection was from 2021. In 2024 the projection was raised to 38%. And it was raised again to 55% in 2025. Data centers are expected to be the largest single source of that growth. So should you run out and buy NextEra Energy? Well, not necessarily. Regulated utilities are granted monopolies in the regions they serve (in exchange they have to get their rates and investment plans approved by the government). So there isn't likely to be a single utility winner, there will be many. And some utilities will probably be better positioned to benefit than others, even though all utilities are likely to see some benefit. Just like with investing in AI, a quick solution is to simply buy a utility ETF like Vanguard Utilities ETF (NYSEMKT: VPU). This way you get a collection of utility stocks in one shot. And given that this ETF uses market cap weighting, performance will be driven by the largest and most dominant utilities. Those are likely to be the ones that best position themselves to benefit from AI's huge electricity demands. The expense ratio is a fairly modest 0.09%. Notably, NextEra is the largest holding in the ETF at just over 10% of its assets. Around 90% of the portfolio is invested in companies with electricity as a core part of their business. And the ETF's dividend yield is an attractive 2.9%, which is more than twice the level of the S&P 500 index. Essentially, Vanguard Utilities ETF is a one-stop shop when it comes to buying the vital pick-and-shovel companies that will keep AI running. What's interesting about Vanguard Utilities ETF is that, like AI, the story isn't likely to be a one-year event. Notice that the projection period that NextEra highlighted was 2040. That's still more than a decade away. If you like AI you might consider buying an AI ETF. You might also consider buying Vanguard Utilities ETF since the one thing that AI will most definitely need is more power. Before you buy stock in Vanguard World Fund - Vanguard Utilities ETF, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the for investors to buy now… and Vanguard World Fund - Vanguard Utilities ETF wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $496,779!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $659,306!* Now, it's worth noting Stock Advisor's total average return is 787% — a market-crushing outperformance compared to 152% for the S&P 500. Don't miss out on the latest top 10 list, available when you join . See the 10 stocks » *Stock Advisor returns as of April 5, 2025 Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool recommends General Motors. The Motley Fool has a disclosure policy. Artificial Intelligence: Think Outside the AI Box With This Vanguard ETF was originally published by The Motley Fool Sign in to access your portfolio
