Soaring valuations, ECB warnings, and extreme market concentration echo the dot-com era, but experts argue the AI trade still has room to run.
MARKET INSIDER – Fears are mounting that the explosive rally in artificial intelligence stocks is being driven more by FOMO than fundamentals, but strategists say investors shouldn’t rush for the exits. The European Central Bank’s latest Financial Stability Review flags global equity markets at persistent highs and warns that an increasingly concentrated group of U.S. hyperscalers—Nvidia, Microsoft, Alphabet, Meta and others—has amplified the risk of a sharp correction.
“Current market pricing does not appear to reflect persistently elevated vulnerabilities,” the ECB cautioned. Investors, it said, may be buying based on optimism that tail risks won’t materialize—or simply because they’re afraid of missing the next leg of the rally. But several strategists insist there is still meaningful value in select AI names.
Julien Lafargue, chief market strategist at Barclays Private Bank, said the ECB’s job is to emphasize risks even when their probability is low. He acknowledged valuations “are not cheap,” but stressed that top AI companies are backing them up with real earnings power. The danger, he said, lies in speculative corners of the market—such as quantum computing—where stock prices are rising ahead of actual results. “Differentiation is key,” Lafargue said. “Some valuations are driven by FOMO, but others are supported by extraordinary earnings growth.”
The warnings arrive after a rollercoaster stretch for global stocks. Nvidia’s recent earnings briefly reignited the AI trade before momentum faded again. Macro concerns, heavy debt issuance, and a sharp crypto sell-off—Bitcoin and Ethereum both plunged this month—have added to market jitters. Even so, the debate over an AI bubble is far from settled. Ray Dalio has raised alarms, while BlackRock’s Larry Fink and Ark Invest’s Cathie Wood reject the idea of a broad market bubble.
The ECB stopped short of declaring one, instead drawing parallels to the dot-com era while noting that today’s valuations are bolstered by “exceptionally robust earnings.” But Vice President Luis de Guindos warned that sentiment could shift abruptly if AI leaders fail to deliver on sky-high expectations. Hedge funds’ leverage, liquidity mismatches in open-ended investment funds, and opaque private-market exposures could magnify stress.
The stakes are high: the Magnificent 7 stocks now make up 40% of the Morningstar U.S. index and are up 24% year-to-date. Morningstar strategist Michael Field sees upside in most of them but calls Tesla more than 50% overvalued. ARM Holdings, he warns, trades at nearly 90 times projected 2026 earnings—double Nvidia’s multiple.
Yet not everyone is flashing warnings. Wedbush analyst Dan Ives insists markets are still in the early innings of an eight- to ten-year AI cycle. “It’s 10:30 p.m. at the AI party—it goes until 4 a.m.,” he told CNBC, adding that Europe, which he says is “in a time capsule” on tech innovation, is watching from the window.
The takeaway: valuations may be stretched and risks are piling up, but this doesn’t look like the moment to abandon the AI trade. Instead, strategists say the smarter move is selective conviction—not getting swept up in FOMO, but not heading for the exits just because the ECB is sounding the alarm.
