How Much Further Can the AI Boom Push U.S. Stocks? Asset Management Giant Warns: Overvaluation Raises Concerns About Future Returns!

Over the past two years, driven by the AI boom, large tech companies have led U.S. stocks to continuous gains. This year alone, the S&P 500 has hit 19 record closing highs. However, in recent days, doubts about whether the AI boom can sustain have been growing.

John Pease, a member of the asset allocation team at U.S. asset management giant GMO, is not fond of the impact that the surge in AI stocks has had on the overall market environment. GMO currently manages approximately $64 billion in assets, and legendary investor Jeremy Grantham is one of its co-founders.

Although Pease did not call it (the AI boom) a full-blown bubble, he stated in a recent interview that the excitement surrounding this technology has pushed the overall valuation of the stock market to a level where future returns are unattractive.

In GMO’s quarterly letter released last week, Pease and his colleague Ben Inker pointed out that U.S. stock valuations are at the 90th percentile compared to historical levels. They noted that U.S. stock prices are even higher relative to risk-free U.S. Treasury bonds.

They are particularly concerned about the so-called "Magnificent Six"—a term Pease and Inker use for the "Magnificent Seven" stocks excluding Tesla—stating that these stocks have an average price-to-earnings ratio of 30. This implies high expectations for the future. It also increases the risk of earnings falling short of expectations, especially as these companies invest heavily in shifting from software to AI infrastructure.

"They are shifting to physical investment, which is very different, and they are doing it at a very fast pace," Pease said in the interview.

"Maybe they will continue to do some amazing things, but historically, when we look at companies and industries that have invested heavily in physical capital expenditure over time, we find that it has brought tremendous technological progress to society and great benefits to consumers, rather than to shareholders," he continued.