Fidelity remains optimistic on AI stocks despite bubble concerns and sector volatility

The global rally in artificial intelligence (AI) stocks is expected to persist despite recent concerns about a market bubble, according to Fidelity International, which remains optimistic about the sector’s long-term prospects. Joseph Zhang, a portfolio manager at Fidelity, emphasised that the current downturn in semiconductor stocks is likely temporary and tied to short-term factors such as hedging ahead of Nvidia’s highly anticipated earnings report.

Zhang, who manages over $10 billion in assets, suggested that unless capital spending or user adoption of AI slows significantly, the sector will rebound from these corrections. “It’s still in the early stage of the party,” he said, cautioning investors against prematurely exiting the AI market. Fidelity’s confidence stems from robust demand trends and ambitious investments by AI developers, coupled with rising earnings and memory chip prices in related firms.

The backdrop to Zhang’s comments is a broader debate among investors about whether the AI sector is overheating. Some market participants have drawn parallels to the dot-com bubble, noting stretched valuations and stock volatility. For instance, Mark Boulton, lead portfolio manager at Pictet Asset Management, acknowledged the possibility of a future reset, cautioning that current enthusiasm might be “a little bit too over-exuberant.”

Supporting this cautious view, the semiconductor sector has experienced profit-taking, with a U.S. chip index dropping over 9% in November, its worst month since March, and Asian peers similarly retreating by more than 7%. Young Jae Lee, senior investment manager at Pictet, admitted that his team’s previous strong bullish stance on Asian semiconductor stocks has softened due to diminished upside potential in major AI chip names.

While some investors point to these signs as warnings, others highlight the unique nature of the current AI-driven growth cycle. Hartwig Kos, head of growth multi-asset at Allianz Global Investors, said it remains too soon to declare the AI boom a bubble, noting the market’s incomplete understanding of AI’s full capabilities. Fidelity’s Zhang argued that criticism of “circular investment” among AI companies fails to appreciate the collaborative ecosystem-building necessary for the sector’s expansion.

An additional factor contributing to recent volatility includes SoftBank Group’s strategic moves, such as its $5.8 billion sale of Nvidia shares to fund a $500 billion AI data center project in the U.S. and multi-billion-dollar funding for OpenAI. These large-scale capital reallocations have stoked speculation about peak enthusiasm in AI markets but also underscore the sector’s transformative scale.

The spotlight remains on Nvidia, a key global bellwether for AI stocks, which is slated to report its fiscal Q3 earnings soon. Despite trading at a forward price-earnings ratio of 29, Fidelity considers Nvidia’s valuation reasonable given its growth trajectory, with its major Asian suppliers, Taiwan Semiconductor Manufacturing Co. and Samsung Electronics, trading at even more attractive valuations. Zhang expects that if Nvidia’s earnings meet expectations, protective hedges in the market will unwind, potentially triggering a rebound in AI-related equities.

However, Deutsche Bank’s asset management CEO, Stefan Hoops, cautioned that there is no historical playbook for an AI bubble, noting that unlike previous tech booms, the current rally is largely driven by retail investors rather than institutions. This shift may influence market dynamics differently, adding an element of uncertainty.

The AI sector’s dominance is also highlighted by the so-called “Magnificent Seven” tech giants, including Nvidia, Microsoft, and Apple, whose combined market gains have significantly powered the S&P 500. Nvidia itself is valued higher than the combined stock markets of several countries, illustrating the outsized impact of AI-related stocks on global markets.

In Asia, enthusiasm for AI investments is tempered by regional macroeconomic challenges, including trade tensions and economic uncertainties in China. Yet, for investors willing to embrace these risks, the potential rewards of the AI revolution remain compelling.

Overall, Fidelity International and several other market participants advocate a balanced perspective: while speculative excess and market corrections are natural in such rapidly evolving sectors, the foundational growth drivers behind AI remain strong. As Joseph Zhang put it, “Over the medium term, we are quite positive on overall tech and AI cycles,” suggesting that current market adjustments may ultimately present buying opportunities rather than signals of an imminent collapse.