It’s hard to resist the lure of a gold rush, especially one powered by machines that promise to think for us. The trouble is, the shiny stuff may be thinner on the ground than investors hope.
According to Panmure Liberum, almost 40% of the value of the US market now rests on what it calls a “speculative component”, essentially, expectations that go well beyond what earnings forecasts can justify.
Much of that froth sits atop the big seven US tech names, whose capital spending plans are approaching $450 billion a year and climbing.
They are betting, hard, that artificial intelligence will deliver huge productivity gains. For now, though, there is little sign of that showing up in the data.
The Bank of England, never one for market euphoria, has already warned that the AI trade is starting to resemble the dotcom bubble of 2000.
By 2027, the 'Magnificent Seven' tech giants and their fellow travellers are expected to account for nearly 40% of total capital spending in the S&P 500.
Strip those firms out and overall investment barely grows. The rest of corporate America is, effectively, on pause.
Europe looks a calmer place. Panmure’s analysts reckon that only 18% of market value across the Stoxx 600 and FTSE 350 can be described as speculative.
In plainer terms, investors here are paying more realistic prices for the growth they expect to get. Implied long-term growth assumptions run comfortably below 10%, compared with 15% or more for the US leaders.
That makes the UK a useful refuge for investors wary of chasing AI dreams.
The broker highlights a clutch of names trading with modest growth assumptions but still credible prospects.
They include the predictable defensives, utilities, insurers and healthcare groups such as National Grid PLC (LSE:NG.), Hiscox Ltd (LSE:HSX) and Hikma Pharmaceuticals PLC (LSE:HIK, OTC:HKMPF), but also a few with more cyclicality: easyJet PLC (LSE:EZJ), Next PLC (LSE:NXT) and BAE Systems PLC (LSE:BA.) among them. Intertek Group PLC (LSE:ITRK), Beazley PLC (LSE:BEZ) and Prudential PLC (LSE:PRU) also make the list.
The point is not that Britain is brimming with bargains, but that its valuations remain tethered to reality. For once, it could be that being left out of the global hype cycle might not be a bad thing.