As the debate surrounding the artificial intelligence (AI) bubble intensifies on Wall Street, the question investors are most concerned about now is when should they get out? Market research firm BCA Research gave the answer in its latest report: When artificial intelligence starts to feel like a "metaverse", the most popular trades in the current stock market may be in trouble.
The AI craze has pushed technology stocks to extremely high levels as technology giants invest hundreds of billions of dollars in artificial intelligence-related fields. In the process, BCA Research has been looking for a special warning sign to remind investors to get out.
Peter Berezin, the research firm's chief global strategist, wrote in a note to clients,When AI has a "metaverse moment" - when a large AI company announces "more capital expenditures" but its stock price falls instead, it may be time for investors to exit.
Stock price declines of this type would mark a "metaverse moment": market sentiment turns from enthusiasm to skepticism. This expression stems from the previous experience of the metaverse - a certain technological narrative was initially very popular, but began to collapse due to the lack of tangible returns. A few years ago, this resulted in companies like Meta ultimately reporting billions of dollars in losses.
As a result, some observers have compared it to the AI boom, with big tech companies investing heavily in chips and data centers. According to media analysis of financial reports, just the four companies at the center of AI transactions, including Amazon, Meta, Microsoft and Google parent company Alphabet, may incur as much as $320 billion in related expenditures this year.
"If this happens, it will be time to run," Berezin wrote in a note. "Until then, we are content to maintain our equity allocation slightly below benchmark levels for a 12-month horizon."
"Not all investors can react quickly to market turns. In this case, I recommend locking in some gains for now," he added.
Two major signals
According to Berezin, there have been two big warning signs for tech stocks recently.
First, free cash flow from so-called hyperscalers — large tech companies that have invested heavily in artificial intelligence — has declined in recent months, which may be a sign that these companies have weaker balance sheets. Berezin said this is similar to what happened in telecom stocks before the dot-com bubble burst.
Second, speculative stocks boosted by AI trading have sold off in recent weeks. This is another worrying sign for the AI industry, Berezin added, noting that quantum computing, rare earths and nuclear energy stocks have suffered recent declines.
BCA Research warned that many investors may have overestimated both the transformative impact of AI and its profit potential: "AI may encounter 'growing pains' in the process of promoting its application. Although it is likely to have a significant positive impact on productivity in the end, this possibility (or even high probability) does not directly equate to the reasonableness of current valuations."
This means that shareholders may not receive returns. The report concludes: “Current artificial intelligence systems bear some resemblance to the airline industry. Without the airline industry, there would be no global economy; but because the aviation industry provides highly homogeneous products and is a capital- and energy-intensive industry, it is almost difficult for airlines to make a profit except during periods of unusually high demand.”