Equity markets are rebounding from the latest AI-bubble fear sell-off. While this will almost certainly not be the last time investors pull back from the theme, we believe the worries are overstated.
Arguments supporting the idea of an artificial intelligence (AI) bubble can be evaluated by means of the price-earnings (P/E) ratio. Bubble concerns centre around both the ‘P’ and the ‘E’ of the ratio.
Let’s start with the denominator: ‘E’. The worries investors have are two-fold (and somewhat contradictory): Either earnings expectations are not high enough – that is, they will not rise sufficiently to generate an adequate return on the capital expenditure investment currently taking place; or else earnings expectations are too high and downward revisions will lead to a market sell-off.
