Investors who left the crypto market because it was full of FOMO and FUD might want to rethink their investments—at least if they shifted to artificial intelligence. A leading investment firm has warned that the sizzling stock market rally that’s currently riding the AI hype wave is being propelled largely by FOMO (fear of missing out), and is unlikely to be sustained long-term.
According to James Demmert, Chief Investment Officer at Main Street Research, the adrenaline-pumping hunger for AI stocks is a temporary phenomenon driven by irrational exuberance, rather than fundamentals.
“The recent market strength is being driven by FOMO by both retail and institutional investors,” Demmert said in an interview with Markets Insider. “We do not think the daily grind upward in the stock indexes is sustainable, largely amid the possibility of mixed earnings reports over the next few weeks and the possibility of yet another Fed rate hike."
Demmert points to the unusually placid markets as an indication of the FOMO-led euphoria. With the volatility gauge hovering around record lows, bullishness has gripped investors.
“Rather than chase stocks at these levels, investors would be wise to be patient at this point and use any corrections as a buying opportunity,” Demmert suggested.
A market correction occurs when the price of an asset changes its trend temporarily because the bulls (people buying) or the bears (people selling) cannot keep pushing prices up or down. It does not necessarily mean that a stock has sustainably changed its trend, but traders are always looking to profit from the next correction.
The Fed’s upcoming policy meeting on March 22 could pour some cold water on the party. The markets expect another 25 basis point nudge upwards for interest rates, which would lift the Fed funds rate to around 5.25-5.5%, topping levels not seen since 2001.
More hawkish guidance from the Fed could also unsettle investors, as policymakers aim to temper excessive excitement that works against their goal of tightening financial conditions.
Earnings reports from tech titans like Alphabet, Meta and Microsoft this week could also exacerbate instability in the AI sector. With several tech firms already issuing “cautious” outlooks, additional weakness may emerge, according to Demmert.
“The AI-related stocks that have left the station are likely to back up, allowing for a better entry level,” Demmert predicted.
Demmert is not alone in his skepticism. Emad Mostaque, CEO of AI firm Stability AI, also cautions that hype could be inflating an “dot AI bubble” even larger than the dot-com bubble of the 90s.
“I think this will be the biggest bubble of all time,” Mostaque told analysts last week.
While the long-term opportunity clearly exists, tools like ChatGPT demonstrate that excessive hype tends to inflate stock prices beyond reason. For example, some believe that AI is the most important invention in human history since the discovery of fire, while others believe it can lead to the extinction of the human kind.
Mostaque, however, has said that integrating AI safely into mission-critical systems will take more time than some believe.
Nonetheless, while exuberance may exceed reason for now, AI’s impact remains dramatic. As Decrypt previously reported, generative AI alone may contribute up to $4.4 trillion annually to the economy. The AI industry overall could reach $15.7 trillion in value by 2030.
With numbers like those dazzling investors’ eyes, some irrationality is to be expected. But irrationality never ends well in markets.
Heeding the warnings of sober analysts and industry experts may help investors ride out the “dot AI” tsunami. But Demmert also added that “only a small part of the train has left the station.”