In a recent quarterly letter, Jeremy Grantham’s asset management firm, GMO, has reiterated its concerns regarding a potential bubble in the artificial intelligence sector. Grantham and his team have raised alarms about the rapid inflation of stock prices in AI and technology sectors, suggesting that the current market resembles classic investment bubbles observed in the past.
Ben Inker, co-head of asset allocation at GMO, expressed his views in the firm’s November 21 communication, cautioning that “AI looks like a classic investment bubble to us, with very high valuations and signs of rampant speculation.” He pointed to staggering increases in quantum computing stocks, which have surged by over 1200% in the past year, raising red flags about the sustainability of these valuations. Inker remarked that even established companies like Palantir appear undervalued in the current market climate.
Despite GMO’s bearish outlook on AI investments, the firm emphasized that its caution does not extend to the broader stock market. Instead, GMO identifies promising investment opportunities outside the AI domain. Inker noted that, unlike in previous economic downturns, such as those of 2000, 2008, and 2021, investors today can find substantial value in various sectors without necessitating a drastic pivot towards safer assets.
Drawing parallels to the dot-com bubble of the early 2000s, Inker reassured investors that there are indeed other assets that provide fair or attractive valuations. This scenario allows for more balanced portfolio management, with less reliance on high-flying AI stocks. He advocated for diversifying into developed market value stocks and international small-cap value stocks, with particular enthusiasm for opportunities in Japan.
Inker also urged investors who remain skeptical about the sustainability of AI investments not to feel pressured into drastic measures. “Plenty of other risk assets are trading at fair or even compelling valuations,” he highlighted, encouraging a shift towards areas that may offer better long-term returns without rejecting the allure of AI entirely. As examples of viable investment avenues, he cited the Avantis International Small Cap Value ETF (AVDV) and the iShares MSCI Intl Value Factor ETF (IVLU), which are positioned to benefit from these alternative market dynamics.
Overall, GMO’s analysis presents a cautionary reminder about the volatility associated with speculative investment trends while simultaneously offering pathways for those looking to safeguard their portfolios against potential market corrections.
