Analysts at the prominent European bank UBS have suggested that the powerful rally in shares of companies linked to artificial intelligence could maintain its momentum well into 2026. This comes despite growing concerns over stretched valuations in the technology sector.
Valuations High, But Not at Bubble Peak
The share prices of leading US tech firms have soared since the start of the year, fuelled by an investor rush to gain exposure to the burgeoning AI revolution. This has pushed the valuation of the benchmark S&P 500 index to 23 times forward earnings, placing it near the top of its historical range.
However, UBS analysts were quick to provide context. They noted that this level remains significantly below the peak of the dotcom bubble in 2000, when the index reached multiples as high as 27 times earnings before crashing to 15 times. "History suggests that high valuations alone rarely end a rally," the analysts stated.
They cited examples such as warnings about "irrational exuberance" in 1996, which preceded the Nasdaq's peak by years, and concerns over a "QE bubble" in 2013, which were followed by further market gains. Their analysis indicates that while elevated valuations might signal more modest long-term returns, markets can keep advancing if corporate profit growth and liquidity conditions stay robust.
Mounting Fears of an AI Bubble
The bullish outlook from UBS contrasts with warnings from a host of other analysts and economists, including those at the International Monetary Fund (IMF). They have cautioned that the frothy valuations of tech businesses could be due for a sharp correction, potentially sending shockwaves through global equity markets.
This divergence in views is already influencing investment strategies. Some investors have begun reducing their exposure to the largest listed US tech companies, seeking greater potential upside elsewhere in the market.
Investors Look Beyond the 'Magnificent 7'
A clear example of this strategic shift comes from the London-listed Polar Capital Technology Trust. While declaring itself "all-in on AI," the trust simultaneously reports being underweight the so-called 'Magnificent 7' mega-cap technology stocks.
Polar Capital argues that businesses outside this elite group stand to gain more from the AI boom. The firm's partner, Ben Rogoff, explained their approach: they "prefer to own companies that are recipients of AI capital expenditure" rather than those primarily deploying it. In results published last week, the firm cautioned that "many commentators appear to be conflating Big Tech with AI which we believe is, at best, an oversimplification and, at worst, misleading."
"History demonstrates to me as a long-term tech investor that what new cycles ultimately do is challenge the value of the incumbency – and that’s what we believe is now beginning to play out in markets," Rogoff concluded, signalling a potential changing of the guard driven by the AI revolution.
