Morningstar suggests that despite widespread investor enthusiasm and elevated company valuations in the artificial intelligence sector, there is no current artificial intelligence bubble. Lochlan Halloway, a market strategist based in Sydney, pointed out that the ‘Magnificent Seven’ stocks, excluding Tesla, are trading at approximately 30 times forward earnings.
While this multiple would be considered high for a typical business, Halloway argues that these companies are exceptional, characterised by high margins, rapid growth, minimal capital requirements, and strong competitive advantages. He stated that valuations are largely aligned with Morningstar’s fair value estimates, indicating a balanced market assessment of risk and reward.
However, Morningstar expressed caution regarding Australian stocks that have experienced AI-like share price increases without corresponding fundamental drivers. Examples cited include Wesfarmers trading at 38 times earnings, Commonwealth Bank at 27 times, and even Coles, a defensive yield stock, at 25 times earnings.
Despite these concerns, Morningstar is not predicting a market correction, noting that investment opportunities still exist. Morningstar is a well-known investment research firm that provides insights and ratings on a wide range of investment offerings. The company also offers investment management services.
