The Confounding AI Revolution...
May 2, 2026
When the markets are mostly higher, as they have been for the last three plus years, I find myself often recommending caution. Yes, Lava Wealth clients have higher cash and money market positions than usual, but they remain mostly invested. Most market analysts are predicting that the market will continue to rise through year end. Still, I feel the need to point out, again, that a rising market creates its own momentum, generating investor overconfidence and complacency when more caution is warranted. Please stay nimble.
The US economy continues to grow, albeit more slowly. Corporate earnings, however, are accelerating, projected to increase by about 20% in 2026 even with the surge in oil prices. Upon further investigation, however, the picture is less glowing. If you exclude the shares of just 7 major AI-related companies – Broadcom, Alphabet, Amazon, Apple, Meta (FB), MSFT, Nvidia – the market value of the remaining 493 stocks in the S&P 500 is actually down for the year. The index has gained over 5% so far in 2026, yet the share prices of more than half of its companies have declined. As Mark Twain popularized - lies, damned lies, and statistics...look deeper.
The latest surge in AI-related equities has renewed the bubble debate, temporarily quieted when broader market gains overshadowed the tech darlings and the market multiple declined. [Market multiple is a valuation gauge produced by dividing the price of a market index (i.e. the S&P 500) by the earnings per share of all companies in that index.] So, is there a market bubble? In AI-related names, unquestionably yes. Examples are everywhere - memory stocks have increased anywhere from 600% to 3000%...in just the last year! (And unfortunately, despite recommendations from people way smarter than me, I missed the move.) Broadcom trades at 82 times its earnings, Advanced Micro Devices (AMD) for 138 times. Open AI and Anthropic are reportedly set to go public at valuations in the hundreds of billions of dollars and yet their total sales – sales, not profits – are only in the tens of billions. A bubble indeed. Caution is warranted…or is it?
Parse the matter a little more thoroughly and you might realize there are two risks in a bubble. The obvious one is staying with your investments too long, being convinced that ‘this time is different’. It never is. Bubbles take an escalator up as they are growing, an elevator down when they pop. Less often discussed is the risk of getting out prematurely. Here’s a sorry personal example. Six months ago, with the stock of AMD around $250 and its p/e multiple approaching 100, I figured that the valuation had reached excessive levels…and yet I hesitated to do anything. As it descended 20% in the next month, I kicked myself for not having the courage of my convictions sooner and sold out the position…still with large (200%+), albeit less, capital gains. It was a wonderful investment. Yet today, only six months later, the p/e multiple is 138, the stock is trading at $360 and I left $150/share of gains on the table. Ugh. Controlling your market bubble fears can be quite profitable. While I had been selling AMD all along and would wish that all my investments turned out so well, I might have just further reduced my holdings instead of selling out completely.
There is so much that is interesting, controversial, exciting, and unknown about the development of AI that I could go on at some additional length…but it’s Saturday and we all surely have more entertaining things to get busy with so I will point out just one more conundrum. About a year ago, Microsoft’s shares began a dramatic climb. The company had Copilot, its AI-enabled product, seemingly the first to monetize AI capabilities. It also had a booming cloud services business, its gaming business, and much more besides. Its share price soared, reaching $555. Meanwhile, Google was widely disparaged, its AI product had had a troubled public debut, its cloud services business was ordinary, trailing far behind Amazon’s AWS and Microsoft’s Azure, its driverless ride business, Waymo, was threatened by Uber and Tesla. Google had been a fabulous investment for years, yet now was being widely disparaged.
What a difference a year makes. Microsoft is now viewed as having an unexciting, uncompetitive AI product, its share price down 30%, punished as a legacy software business, vulnerable to being disintermediated by other AI models. At the same time, Google’s latest version of Gemini is driving its search business forward, its cloud services business has robust demand, Waymo is the leading autonomous driving company, viewed as a formidable competitor. While MSFT shares were sinking 30%, Google shareholders enjoyed a 50% gain. And my point? The winners and losers in the unfolding economic revolution that AI is creating are far from clear. Most investors have already seen this movie before. Those who refuse to learn from history are doomed to repeat it. Pets.com anyone? AOL? Netscape? MySpace? Look carefully, act judiciously, conclude reasonably, remain open-minded. Otherwise, when you assume…
Keeping with our AI theme today, I do not have an article to refer you to…I have a movie. I came upon The Thinking Game on an endless plane flight. It is a terrific documentary (available at least on Amazon Prime video - and on some plane flights obviously.) It follows Demis Hassabis, an early chess prodigy who leaves the game behind, becomes the founder of Deep Mind and undertakes a relentless quest to harness artificial general intelligence. It is a well-made telling of the early development of AI capabilities which led to great advancements in understanding human biology and the 2024 Nobel Prize in chemistry. I think you will find it heartening and a well spent 83 minutes.