New risks
That transition may be playing a role in why markets have suddenly become more volatile.
Last Friday, the tech-heavy NASDAQ Composite fell more than 4% following a surprisingly strong jobs report that raised concerns monetary policy may need to remain tighter for longer.
After mounting a partial recovery on Monday, the market slipped again over the course of this week. Yesterday’s rally, a response to the diplomatic breakthrough in Iran, brings both the S&P 500 and the NASDAQ roughly back to where they closed last week.
The recent volatility arrives after an extended rally in AI-related stocks that has been driven by standout earnings performance—especially among semiconductor companies.
Even with the recent pullback, the NASDAQ remains up around 11% year-to-date through yesterday. The Philadelphia Semiconductor Index (SOX) has dramatically outperformed, up roughly 75% in the same time frame, as demand for many types of chips outstrips supply.
Against this relatively healthy backdrop in public markets, the AI complex is looking for financial support.
To some extent, this is about creating liquidity for founders, employees, and early-stage investors. But mainly, it is about funding growth.
This shift does not necessarily mean AI growth cannot continue, nor does it mean we are witnessing a speculative bubble on the scale of the late 1990s.
But it does suggest investors need to think carefully about how they can be best positioned to benefit from the long-term development of AI.
IPOs tend to come with a lot of hype. Wall Street is heavily incentivized to present these businesses as irresistible opportunities.
But historically, many IPOs eventually disappoint once the initial excitement fades and the business fails to deliver on ambitious financial targets… or investors simply move on to the next shiny object.
That does not mean SpaceX or the coming generation of AI IPOs are destined to fail, but it does present new challenges. The forthcoming SpaceX IPO, in particular, presents unique risks that affect even investors in passive index strategies.
This is mainly because of its valuation. In our view, SpaceX looks quite expensive relative to underlying fundamentals, even considering its exceptional growth prospects.
Yet not all AI stocks are priced like this.
Investors should pay close attention to the relatively extreme valuation disparity between SpaceX and other leading AI stocks with starkly different financial profiles.
As SpaceX directs both investor attention and capital away from these opportunities, valuations in many cases start to look compelling.
