Artificial intelligence is the talk of the town – and fund managers are paying close attention as they enter the final quarter of the year. Beyond earnings, geopolitical developments and central bank decisions, the fourth quarter could also see performance pressure and potential market disruption as investors rebalance their portfolios amid talk of an AI bubble. So how do investors balance this with the desire not to miss out on a potential $4.8 trillion market? “Valuations and policy uncertainty make it difficult to overweight risky assets, but we also don't want to fight against strong momentum and continued earnings growth,” said John Wyn-Evans, head of investment strategy at Rathbones. He noted that his company takes a more neutral stance on risk, but its key sector considerations are technology, healthcare, media, industrials and financial services. Bubble concerns Stocks – especially those related to AI – have soared this year. The tech-heavy Nasdaq Composite rose more than 11% in the third quarter and is up about 20% this year. The price continued to rise in October, reaching new record highs. Market participants – and even central banks – appear divided on whether AI-powered investments constitute a market bubble. The Bank of England and the IMF have warned of rising share valuations, but banks such as Goldman Sachs appear less gloomy, saying the market is not yet in bubble territory. AI investments serve as an antidote to weaker parts of the economy, says Derek Hynes, fixed income portfolio manager at Wellington. “But any loss of confidence in this area could have an outsized impact on financial conditions and therefore requires careful monitoring.” Will Mcintosh-Whyte, a fund manager on Rathbone's multi-asset team, said it's “difficult to bet against the AI-related baskets.” “Momentum remains strong and is largely supported by earnings numbers,” he added. “However, we are wary of positioning and remain vigilant against overvaluations.” .IXIC YTD mountain Nasdaq Composite Stephen Yiu, fund manager at Blue Whale Growth Fund, maintains a significant underweight position on the Magnificent 7 stocks after selling out Microsoft and Meta in the second quarter. However, he remains optimistic about Nvidia. He said many large companies are spending a lot on AI, but it may not be profitable for investors in the long run. “Are they getting enough revenue from that? Do they also have a margin impact, even though they might be making more money?” he said. “But then we think the incremental margin for, let's say Microsoft, charging us for a subscription to Copilot would be lower than what they charge us for a subscription to Office365, which they don't have to pay Nvidia for, so those will be things we look forward to,” Yiu added. 'Nvidia remains a bellwether' Corporate AI spending and revenue will take center stage during earnings season as companies continue to seek efficiencies while others build out much-needed infrastructure such as data centers. Now “all eyes will be on AI investment and AI adoption, with everyone trying to separate the sheep from the goats,” Wyn-Evans said. It comes as a slew of recent AI deals have raised eyebrows, with some concerned they are too circular. For example, AI cloud infrastructure company CoreWeave is tied as a buyer and seller with OpenAI and Nvidia. Meanwhile, competition is also increasing as newly founded startups rush to capitalize on AI and help other companies do the same. NVDA YTD mount Nvidia “Nvidia will continue to be an important bellwether for the AI business, and we will also keep an eye on the capex trends of the hyperscalers,” Mcintosh-Whyte said. “We will also look at software names to demonstrate their ability to continue to capture revenue from AI capabilities and defend themselves against disruption.” Yiu of the Blue Whale Growth Fund has his eye on advanced memory storage because “it is on the receiving end of AI spending.” Advanced memory storage companies, such as Seagate and Western Digital, are focused on storing and processing the massive amounts of data required by AI, as well as the vast amount of data generated by AI itself.
