Record Market Highs Driven by AI Frenzy: Investor Caution Urged

Global markets soared to unprecedented heights this week, fueled by the excitement surrounding artificial intelligence, which bolstered risk appetite and optimism for a resurgence in economic activity. Nevertheless, some investors are sounding a note of caution, highlighting the lofty valuations in the technology sector that could potentially jeopardize the ongoing rally.

Oliver Bäte, CEO of wealth management giant Allianz overseeing approximately $1.85 trillion in assets, expressed wariness, remarking, “It looks very dangerous out there.” “We are very cautious about some of the valuations in the tech sector,” he emphasized during an interview on CNBC’s “Squawk Box Europe” on Friday.

The momentum in European markets persisted on Friday following the Stoxx 600 index’s record close in the preceding session. Fresh earnings reports from Europe, combined with the positive impact of Nvidia’s robust revenue figures in the U.S., propelled the pan-European benchmark to 495.1 on Thursday, surpassing its previous peak of 494.35 in January 2022, as reported by LSEG, formerly Refinitiv. Both Germany’s DAX and France’s CAC also achieved record highs.

In the Asia-Pacific region, Japan’s Nikkei 225 surged to a new all-time high of 39,098.68 on Thursday, eclipsing the previous record set in 1989. This surge in market indices echoes similar gains witnessed in the United States, with stock indexes reaching fresh historic highs.

Japan's rapid market surge raises questions
Japan’s rapid market surge raises questions amid lingering demographic and economic fundamentals.

The enthusiasm is amid the escalating anticipation surrounding AI advancements and the anticipated economic boost it could deliver. Nvidia’s shares surged by 16% on Thursday following its impressive full-year results, which showcased a 265% increase in revenue driven by surging demand for its AI chips. This surge propelled Nvidia’s market capitalization by $276 billion, marking the largest one-day gain for any company on record.

Bill Winters, CEO of Standard Chartered, hailed the recent market rallies as a demonstration of AI innovation across various sectors, noting his company’s substantial gains from the tech sector. This affirmation came on the heels of the bank’s announcement of an 18% increase in pretax profit and a $1 billion share buyback program in its full-year earnings report.

However, Philippe Ferreira, deputy head of economics and cross-asset strategy at Kepler Cheuvreux, raised doubts about the sustainability of the AI-driven market euphoria.

“Over the course of the year, it is likely that the overall AI theme will get a reality check at the companies’ level,” Ferreira cautioned in communications with CNBC earlier in the week. “The AI trade as we have seen it might have a little more to go, but it seems to be approaching important technical levels where some profit-taking could occur.”

In the U.S., investors flocked to growth and technology stocks this week, propelling the Dow Jones Industrial Average and the S&P 500 higher. The tech-heavy Nasdaq Composite also surged, recording its best session since February 2023, closing at 16,041 on Thursday. For Ferreira, key exit levels around 18,300 on the NDX by early March could signal a substantial consolidation phase.

Allianz CEO warns of tech sector valuations
Allianz CEO warns of tech sector valuations, echoing concerns about market risks.

“There is no shortage of fundamental catalysts and important reckonings could be up ahead,” he added. Despite the bullish sentiment, Bäte of Allianz reiterated concerns about lingering pockets of risk, particularly in the tech sector. “If I was individually investing [in tech], great idea. As an institutional investor, you need to be a bit careful,” he cautioned.

“There’s a lot of risk in investment markets, there’s a lot of questions about credit markets, there’s a lot of questions about real estate,” he underscored. “It’s very dangerous out there.” Regarding Japan’s remarkable rally, Aoifinn Devitt, chief investment officer at investment advisory group Moneta, expressed reservations. She noted that the recent surge seemed to have diverted attention from underlying market fundamentals.

“All of a sudden, it seems that shareholder value is returning to Japan, that the time has finally come,” Devitt remarked on “Squawk Box Asia” on Friday. “It still is a little bit of a concern as to why Japan has risen by quite so much so quickly, when some of the fundamentals around the demographics, around the deflationary history, none of that has changed.”

Sajda Parveen
Sajda Parveen
Sajda Praveen is a market expert. She has over 6 years of experience in the field and she shares her expertise with readers. You can reach out to her at [email protected]
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