As investors worry about a bubble in U.S. tech, some are seeking global diversification.nicoletaionescu/iStockPhoto / Getty Images
Enthusiasm for the artificial intelligence (AI) revolution has led to concerns about an AI bubble, with some investors remembering the dot-com boom of the late 1990s.
It’s not helping that much of the U.S. stock market’s momentum appears to be coming from a small number of AI companies, says Paul Moroz, portfolio manager at Mawer Investment Management Ltd. in Calgary.
Recently, the breadth of the S&P 500 was the narrowest it’s been since the 1990s, he says.
“A big chunk of the growth, arguably half, is being pulled along by AI investment. There’s a lot of excitement, a lot of money being made, and that’s propping up both the economy and the stock market.”
Money managers say it’s still unclear if U.S. AI companies are overvalued, but agree that now might be the time to seize opportunities beyond Silicon Valley and look toward Chinese technology firms or entirely different sectors left behind by the AI frenzy.
Mr. Moroz is not a fan of leaving AI out of anyone’s portfolio as its influence is already being felt in our day-to-day lives, but how much to allocate and exactly where “isn’t so clear cut.”
“A lot of these [U.S.] companies are asset-light and can grow very rapidly,” says Mr. Moroz, who is lead manager of Mawer Global Equity Fund. “The danger is that so many players are investing as if they’ll each be the winner, but in reality, they might only capture 20 per cent of the revenue.”
Darren McKiernan, senior vice-president, portfolio manager and head of the global equity and income team at Mackenzie Investments, says all bubbles are “rooted in some sort of truth.”
“The internet did transform our lives, and housing prices did look stable until they didn’t,” Mr. McKiernan says. “The tricky part now is that the order of magnitude of spending around AI is much higher than in past cycles, so it’s natural to wonder if something’s brewing.”
He’s cautious not to write off the whole sector, holding AI powerhouses such as Microsoft Corp. MSFT-Q, Broadcom Inc. AVGO-Q, Meta Platforms Inc. META-Q, Amazon.com Inc. AMZN-Q and Alphabet Inc. GOOG-Q. For him, the focus is on prudence and balance.
“Many of these companies have incredibly clean balance sheets and are generating significant cash flow,” he says. “That’s different from the [2001] telecom bubble, when companies were overindebted and losing money.”
And company valuations for some of these tech giants might not be so out of whack. For example, Microsoft trades at roughly 34 times this year’s earnings, and about 29 times forward earnings.
“It’s not cheap, but it’s not 70 times earnings either,” Mr. McKiernan says. “If the spending cycle cools, profitability could actually rise.”
Tech opportunities abroad
Silicon Valley isn’t the only place for tech-focused investors.
“We’re seeing growing interest in global diversification, particularly in markets such as China, which have their own AI ecosystems but trade at much lower valuations,” says Alexander Smahtin, portfolio manager at Global X Investments Canada Inc.
The asset manager recently launched Global X China Hang Seng Tech Index ETF CHQQ-T, which provides exposure to major Chinese technology firms.
China’s large stimulus package in late 2024 helped kick off a rebound in equities, especially in technology, Mr. Smahtin says, and this optimism was topped up by the release of the DeepSeek AI model last January.
“Some of the same positive sentiment that surrounded U.S. AI stocks is now starting to be felt in China,” he says. “The difference is that it hasn’t been fully priced in yet.”
Like other investments in China, AI comes with risks related to the country’s regulatory environment, so it’s still an “approach with caution” scenario.
“But there are also structural tailwinds,” Mr. Smahtin says. “Domestic household wealth in China remains underinvested in equities, and foreign inflows are only beginning to pick up.”
For Mr. Moroz of Mawer, the key for investors is to diversify and recognize there can be multiple outcomes to the AI boom, calling it a “very unique period in history” that could deliver significant winners and losers.
“You’re going to have some capital that’s misallocated; you’re going to have some infrastructure that is overbuilt at some point. You’re also going to have some fantastic things that work out,” he says, adding that riding the highs and lows is part of the experience.
“After the tech bust, Amazon stock was down like 90 per cent. And, of course, you should have hung on to your Amazon stock, right?” he says. “In hindsight, you’ll wish you’d just held on.”