Amid warnings from the IMF and Bank of England over soaring AI-related valuations, strategist Joost Van Leenders says markets are in stage three of a five-phase correction cycle. Investors are watching closely for signs of broader pullbacks.

New York

Len Scott Kempen, Senior Investment Strategist at Venn, addressed concerns raised by the Bank of England and the International Monetary Fund regarding elevated AI-related stock valuations and the possibility of a market correction. Kempen noted that while US tech company valuations are high, they are not necessarily excessive given past profit growth, but risks remain if earnings projections are not met.

Kempen suggested the current market may be in the third stage of a five-stage bubble, with significant AI investment activity and companies financing each other as potential warning signs. He indicated that while the US market is most at risk, European stocks could also be affected, though the broader economic impact may be limited due to lower levels of debt financing compared to previous crises.

Market correction fears grow as strategist says we’re in stage three of five

Senior Investment Strategist at Venn, Len Scott Kempen. Yes, good morning. Thank you for being with us. It's pretty unusual to hear from the Bank of England and the IMF on the same day, ultimately, raising concerns around AI valuations and the potential here for a market correction. What do you make of their comments and do you agree that there is a risk here? Yeah, well, we've seen comments like these emerging sort of over the past weeks or months, I think. We see the huge investments in AI, which cause doubts on essentially the profitability of this. I think it's a coincidence that the IMF and the Bank of England warn at the same day. The IMF frequently or more often warns about risks in the global economy, be it from AI or sometimes parts of the financial sector. It's a coincidence that they're together at the same day, but it fits a pattern that we see over the past few weeks, I guess. It might be a coincidence, but what do you make of their comment in terms of ultimate risk here for investors? Is there actually potentially a bubble forming here? As you highlighted, we have also heard the Fed chair suggesting the valuations are also too high at this stage. Are we approaching the point of a market correction? That's a good question. It's hard to say. I think when you look at the valuations of the big US tech companies, they're not excessive, for example, on a forward PE basis. In somewhere in the 30s, most of them, and that is high, but there are also companies who have shown to be able to grow their profits in the past steadily and strongly. That justifies high valuations. It depends, of course, on the projections of those earnings. When you look at trailing earnings, valuation on trailing earnings, they're higher, but it depends all on your expectations for earnings growth, which are high. There's a risk there. I guess when you look at, so on a valuation basis, you can argue that's a bubble. I'm not sure that that's the most strong indication. When you look at, for example, investment in AI and the growth in investments, and the fact that some of these companies are financing each other, they're buying each other's stocks or financing each other. I think those are also signals of a bubble. If you think of a bubble of about five stages, we're probably in stage three. As long as there's more demand for AI, which we see from companies, from individuals, I think it can continue, but how far is obviously the big question. I just would like you to look at this scenario one more time before we move on to other topics. When you think about a potential market reaction of the back of concerns around AI valuations, could this mean a broader correction for the global market? Would there be spillovers, for instance, for Europe, or could this be more contained, given the size of the AI investments are actually mostly taking place in the US? Yes, so the US is the biggest risk. If there appears to have been a bubble and projections are not feasible, then you will have a big correction. But I think when you look at, when you look back to the dot-com bubble in 2000, you also saw European stocks falling a lot. I wouldn't say that European stocks are fully shielded. But yeah, obviously, the US is more at risk. The valuations are higher. So it is a bigger risk. But I would see, and it's very unlikely that Europe would be fully shielded. When you look at sort of the broader impact on the overall economy, I think this boom has not been financed too much with debt, and certainly not with bank debt. So in that sense, the effects for the broader economy would be limited. In that sense, I think it's also comparable to the dot-com bubble. We saw a huge reaction on equity markets at that point, but a limited reaction in the real economy. So it's more like, I would say, 2000, than, for example, the financial crisis in 2008, 2009.

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