Big-name investors like Jeremy Grantham worry we're nearing the peak of another tech bubble. What if the rally is just beginning?
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- The S&P 500's Shiller CAPE ratio is high, sparking bubble concerns among investors.
- But Morgan Stanley's Katy Huberty argues the AI-driven bull market is just beginning.
- Huberty sees $10 trillion in AI infrastructure investment potential.
It's not hard to understand why current stock market conditions are making some big-name investors worried.
With the S&P 500's Shiller CAPE ratio at around 38 amid a 67% rally since October 2022, the market is at one of its most expensive levels ever as excitement around AI soars. As such, Jeremy Grantham, Rob Arnott, Bill Smead, and others have warned in recent months that stocks are in a bubble reminiscent of the dot-com peak in 2000.
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But what if the AI-driven, bull-market run is, in fact, just getting started?
Katy Huberty, the global head of research at Morgan Stanley, argues just that.
Huberty's bullishness stems in part from where she believes we are in the AI capex and adoption cycle, she told BI on Thursday. Each wave of technology development going back decades is roughly 10x the previous cycle in terms of both user adoption and business investment to build out the products, she said.
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She estimates $10 trillion in capex will need to be poured into developing AI. With mega-cap hyperscaler firms only having spent roughly $300-$400 billion total over the last two years, there's still a ways to go, Huberty said.
"If we're talking about ultimately a $10 trillion AI infrastructure investment, we're at single-digit penetration today," she said.
Another data point that tells her we're still at the beginning of the AI cycle is that earnings revisions for the market's top tech companies still have plenty of upside when considering the path they took during the mobile internet cycle starting in 2010.
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Price multiples are also relatively low compared to what they were at the tail-end of the dot-com bubble, despite similar revenue and earnings numbers.
The median 12-month forward PE ratio for the top five stocks by market cap in 1999 was 65.3. In 2024, it was 31.1.
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"We're only 15% of the way through the typical estimate revisions and market cap expansion of a new computing cycle," Huberty said. "So those are two data points that tell me we're still very early."
She continued: "There's still a lot of alpha generation to come. That doesn't mean you can't have a quarter or a six- or 12-month period where the market digests before you see the next inflection point."
As for how to invest in the next stage of the cycle, Huberty likes AI beneficiaries or non-AI companies whose profits will be boosted by the technology.
"We're at this tipping point where adoption is now much more broad-based," Huberty said.
"None of this is priced," she continued. "To justify that $10 trillion of infrastructure investment, you have to see the impact on efficiency. And we think it's coming here pretty quickly."
She said an analysis by her team showed that financial stocks seem to be best positioned to benefit first from AI adoption.
One way investors can gain exposure to the sector is through exchange-traded funds like the Financial Select Sector SPDR Fund (XLF), the Vanguard Financials ETF (VFH), and the iShares US Financial Services ETF (IYG).