Banking giant gives verdict on AI stocks bubble

Core Insights - Citi's analysis indicates that while AI stocks have experienced rapid gains, they have not yet reached bubble territory, with overall sector valuations remaining reasonable [1][2] - The bank's internal valuation monitor has identified only a few red flags in broad AI exposure, suggesting that the recent rally is strong but still tied to earnings fundamentals [2][4] Valuation Concerns - Emerging risks are noted in asset-heavy segments of the AI ecosystem, particularly among U.S. industrial and infrastructure-linked companies that have seen significant price increases [3] - Investors are advised to consider profit-taking in these areas while maintaining diversified exposure to AI [3][4] Investment Strategy - Citi favors a "growth at a reasonable price" (GARP) strategy, focusing on companies with earnings expectations aligned to market forecasts and sustainable growth potential [4] - The distinction between asset-light and asset-heavy AI models is becoming increasingly important as firms integrate AI into their business strategies [4] Market Comparisons - Concerns about an AI bubble are rising, with comparisons made to the late-1990s Dot-com era, as the top ten U.S. companies driven by AI now account for nearly 40% of the S&P 500's market capitalization [5] - The S&P 500 index's price-to-book ratio has surpassed its 2000 high, and investor behavior shows signs of "bubble psychology" with capital flowing into AI stocks regardless of profitability [6] Differentiating Factors - Unlike the internet boom, many AI leaders, particularly in semiconductors and cloud services, are profitable and generating cash, funding their expansion through internal resources rather than speculation [7] - AI technology is being integrated into established industries, enhancing efficiency and productivity, rather than relying on untested business models [7]