- XLK
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Many artificial intelligence (AI) stocks are trading at some lofty premiums, with many investors and analysts believing that a bubble has formed. This can happen with new technologies. Expectations become inflated, and so too do stock valuations. Year to date, the State Street Technology Select Sector SPDR ETF(NYSEMKT:XLK) has risen by 36%, and is up about 160% in five years — far higher than the S&P 500‘sgains of around 80%.
Billionaire investor and hedge fund manager Ray Dalio believes there is indeed a bubble that has formed and could pop soon, as rising debt loads and elevated interest rates could prove too much for this scorching-hot market.
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Dalio sees trouble ahead
At a recent conference, Dalio raised concerns about the growing amount of debt companies are raising to fund their AI initiatives. Even top tech companies that generate significant free cash flow are loading up on debt. It’s a worrying trend, especially with the Federal Reserve raising interest rates recently, for the first time in three years.
As rates rise higher, which many analysts believe they will, Dalio believes that’s when the bubble may start to pop. That moment may not be imminent, however. “We’re in the part of the cycle that is before that but approaching that.”
To make matters worse, Dalio also believes that as people sell stocks in order to get cash and lock in their gains, this may further put pressure on the bubble. Bond yields have been rising, making bonds increasingly attractive to investors seeking safer investments.
Is now the time to turn away from tech?
Investing in tech stocks these days is a bit risky, as even those that aren’t trading at sky-high valuations have benefited from stronger earnings numbers due to heavy spending on AI.
Even tracking an exchange-traded fund such as the State Street Tech fund may not provide investors with much protection, as it’s heavily dependent on how tech giants such as Nvidia, Apple, and Microsoft will perform. Those three account for close to 40% of its entire portfolio.
For investors who are risk-averse or not willing to hang on for the long haul, now may be a good time to consider safer investment options outside of tech. Even if the AI bubble doesn’t burst soon, AI stocks have been volatile of late, and further rate hikes could weigh down their valuations.
