Bigtech valuations vulnerable as AI hype peaks: Analyst

As the hype around artificial intelligence (AI) technologies nears its ‘peak of inflated expectations’, Morgan Stanley analyst Anton Kryachok has warned investors that the ambitious earnings expectations for many of its bleeding-edge adopters and innovators may go unrealised.

In a nod to Gartner’s ‘Hype Cycle’ concept, Kyrachock, a portfolio manager in Morgan’s international equities team, has warned that the current ‘Peak of Inflated Expectations’ surrounding AI may quickly devolve into a ‘Trough of Disillusionment’, as the technology fails to fully deliver on promised efficiency gains and as more nimble competitors – increasingly from outside the US – enter the innovation space.

Kyrachock fears that ambitious earnings expectations built into many US stocks based on these promised gains may be under threat.

For instance, he noted market wariness around Microsoft’s unprecedented AI spending commitments – upwards of US$80 billion – following its January results, with outsized AI infrastructure spending moving ahead in what is becoming a highly competitive space.

Overall, according to data from S&P Global, the leading five AI hyperscalers were projected to spend more than $1 trillion in capex collectively from 2024 to 2027, with the promise of considerable revenue boosts for these companies as a result.

Kyrachock also cautions investors in the GenAI bubble that these stocks “may be nearing their pricing peaks”. This is in the midst of already elevated valuations in the broader market – with the MSCI World Index’s current P/E ratio at 19 times earnings, even without accounting for the Magnificent Seven – and increasing market concentration in only a small handful of perceived GenAI ‘winners’ based in the US.

The release of China’s home-grown GenAI model, DeepSeek, “built on a comparatively shoestring hardware budget”, Kyrachock said, should serve as a warning for those invested heavily in America’s AI-focused bigtechs.

The unexpected launch of DeepSeek, which saw around a trillion dollars wiped off US indices less than 24 hours after its release (with Nvidia alone losing more than $400 billion in the immediate aftermath before a modest recovery), exposed not only the fragility of stock markets, but also the dependency of US and developed market returns “on a small number of large technology companies which have dominated gains”, Kyrachock said.

“Such new technologies could have a prolonged impact as stock markets adapt to potentially cheaper ways to advance AI,” he added.

“This could weigh on the prices of technology shares and the Magnificent 7 in particular, led by Nvidia, which are trading at very elevated valuations.”

Another factor to consider is that US and global stocks remain “weighed down” by Trump’s mercurial trade policies and as yet unrealised deregulation agenda, as well as the potential second-order effects from inflation.

Despite the warning bells, Kyrachock still sees significant opportunities for global equities investors in select hyperscalers, or large cloud service providers, along with IT service companies that advise businesses on how to implement GenAI.

“We see opportunities and invest in a significant number of data-centred companies, such as credit bureaus, information service providers, exchanges and businesses with significant amounts of proprietary data.

“In combination with their strong pricing power, we believe these companies should be able to identify cost opportunities to monetise AI and crucially, retain the benefits,” Kryachok said.