Market update: “Boom or Bust?“

The market has recently been wavering between hope and scepticism with regard to AI. In November, concerns about markets running too far ahead briefly prevailed. However, the temporary weakness in prices did not last too long – driven by renewed expectations of a possible US interest rate cut in December (which actually followed last week), prices quickly reversed course.

Artificial intelligence remains the dominant topic on the capital markets, both in a positive and negative sense. While hopes for future productivity gains fueled prices over the course of the year, these hopes briefly gave way to skepticism in November. Almost all media outlets – from small regional newspapers to renowned financial journals – discussed the possibility of an “AI bubble”. The mere fact that “everyone” is talking about it tends to argue against a speculative bubble. Investing in securities involves both opportunities and risks.

Anatomy of a speculative bubble

One of the most famous speculative bubbles dates back many centuries, when the well-known tulip bulb bubble burst in Holland in 1637. The phenomenon of speculative bubbles has therefore been known for a long time, yet there is still no accepted definition or even a sound method for recognizing them. Economist Charles P. Kindleberger attempted to model the “ideal-typical speculative bubble” and describes it in five phases, as shown below.

According to this model, the first phase is a shift phase, in which external events can fundamentally change the markets. According to Kindleberger, this is followed by a credit-financed boom phase, which leads to absolute euphoria among investors. In this phase, market participants act irrationally, and market prices significantly exceed the real value of the investments. The turning point – when the first doubts set in – is often initiated by interest rate increases, and finally “disgust” sets in, where sheer panic among market participants leads to a decline in price gains.

Applied to the current market phase, some of these points certainly apply. AI is revolutionary in nature – the shift in investments is in full swing and we can certainly speak of an investment boom, albeit one that is not credit-financed. A certain euphoria is also evident in some sub-segments – second-tier companies in particular seem to have lost their sense of proportion in some cases. With regard to the overall market or the tech giants, we do not see any signs of a bubble – valuations are above average, but corporate profits are also rising disproportionately.

Nvidia delivers once again!

Setbacks such as those seen in November are no surprise given the high valuations and could, or will, be even greater if profits disappointed. However, predicting this is anything but reliable. The current picture is different – Nvidia’s figures remain good, with annual revenue and profit growth in excess of 60%.

In addition, the general investment environment remains constructive – corporate profits are rising, the economy is growing, and we are in a cycle of interest rate cuts. We are therefore confident about the coming months. We expect this to be accompanied by increased volatility, i.e. fluctuations. A balanced portfolio structure is the order of the day. Please note the opportunities and risks associated with investing in securities.

 

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