By Dhara Ranasinghe
LONDON (Reuters) -Markets may have weathered a key Nvidia earnings test but the ability of big tech to move sentiment across markets on a dime will continue to preoccupy investors as lofty valuations persist.
AI darling Nvidia on Wednesday surprised Wall Street with accelerating growth after several quarters of slowing sales and a fourth-quarter forecast that exceeded expectations.
While the relief across world stocks was evident on Thursday, even Nvidia’s upbeat results were unlikely to dispel concern around a fall back to earth for highly-valued tech stocks, amid lingering concerns about whether AI spending will pay off.
Global stocks have dropped almost 3% this month, set for their biggest monthly fall since March, in part driven by concerns that a rally in tech shares has gone too far, too fast.
“The concerns around tech will persist and each quarter we are likely to come across the same concerns as markets question the concentration,” said Seema Shah, chief global strategist at Principal Global Investors in London.
“That story won’t go away.”
Shah said that while she was overweight U.S. stocks, she was also wary of concentration risks and this was one reason why she was looking at European shares.
AI COMPANY RESULTS AS IMPORTANT AS DATA PRINTS
Investors and analysts say as AI emerges as a so-called mega-trend, earnings results such as those from Nvidia have become as key to shaping views on the economic outlook as monthly economic releases. Next big dates in the calendar range from upcoming tech earnings to signs of how widely AI is being adopted, justifying the spending.
Investors need to brace for a bumpy ride.
“Investors do need to worry about bubble risks,” Mark Haefele, chief investment officer at UBS Global Wealth Management, told reporters on a call about the 2026 outlook on Thursday.
The so-called “Magnificent Seven” – including Nvidia and Meta – have seen their share prices soar, fuelling fears about the scale of market exposure to just a few names.
Technology firms are among the stock market’s big fallers in recent days, although they are still well up on the year.
The S&P 500 tech sector’s forward price/earnings ratio – a measure of how much a company is worth compared to future earnings – is about 30 times, well above its 10-year average of 22.2.
The AI stocks frenzy has drawn comparisons with the 1990s dotcom boom and bust, while concerns were rising about debt taken on by tech firms.
Nvidia produced $60 billion in free cash flow over the past 12 months, David Trainer, CEO of investment research firm New Constructs, said in a note. To justify its current stock price, it would need to produce $2.1 trillion in annual cash flows within 10 years, he said.
On Wednesday, speaking before the Nvidia results, Amundi, Europe’s biggest asset manager, said it was underweight megacap stocks.
While it had not sold down the stocks in most portfolios, it has been hedging with derivatives that give it the option to sell them instead, Amundi’s CIO, Vincent Mortier, said.
Principal Global’s Shah said she was looking towards Europe.
“Europe has a lower exposure to tech so it is a nice way to diversify against concentration risk,” she said.
(Reporting by Dhara Ranasinghe; additional reporting by Yoruk Bahceli; Editing by Elisa Martinuzzi and Ros Russell)
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