Analysts at UBS have indicated that the recent surge in share prices of AI-related stocks could persist well into 2026. This optimism is rooted in the robust demand for technology investments, as evidenced by the S&P 500 index, which is currently trading at 23 times forward earnings. This valuation is notably high but remains below the peak reached during the dotcom bubble in 2000, when the index’s multiples soared to as much as 27 times before experiencing a sharp decline to approximately 15 times.
The UBS analysts stated, “History suggests that high valuations alone rarely end a rally.” They highlighted that concerns regarding “irrational exuberance” in 1996 preceded significant gains for years, similarly, apprehensions about a “QE bubble” in 2013 did not prevent further market advancements. While elevated valuations typically suggest more modest long-term returns, the analysts believe that as long as profit growth and liquidity remain robust, the market can continue its upward trajectory.
Concerns Over Potential Market Corrections
Despite the positive outlook from UBS, several analysts and economists, including those from the International Monetary Fund (IMF), have cautioned that the inflated valuations of tech companies may eventually lead to a sharp market correction. Some investors have begun reducing their stakes in major US tech firms, opting instead to explore potentially more lucrative investments elsewhere.
One such example is the London-listed Polar Capital Technology Trust, which has expressed a firm commitment to AI investments while simultaneously being underweight in the so-called “Magnificent Seven” technology companies. The trust argues that non-Magnificent Seven firms stand to benefit more from the AI boom, stating a preference for companies that are the recipients of AI capital expenditures rather than those deploying the technology.
The firm emphasized, “Many commentators appear to be conflating Big Tech with AI, which we believe is, at best, an oversimplification and, at worst, misleading.” Ben Rogoff, a partner at Polar Capital, noted that historical trends suggest new market cycles challenge the value of established companies, a phenomenon he believes is currently unfolding.
Long-Term Perspectives
The ongoing debate over the sustainability of current valuations underscores the complexity of the market landscape. Elevated valuations may point towards a struggle for the S&P 500 to replicate its average annual return of 9.7% observed over the past two decades. Nevertheless, the prevailing sentiment among some analysts is that the market has the capacity to move forward, fueled by strong profit growth and ample liquidity.
As investors navigate these waters, the divergence in strategies reflects the broader uncertainty surrounding the tech sector. While some remain bullish on AI and its potential impact, others are cautious, wary of the corrections that may follow a prolonged period of high valuations. The coming months will be critical in determining whether the current trends hold or if adjustments will be necessary as the market evolves.
