Investors are excited about OpenAI’s expansion driving big gains in technology stocks, but a rising number of Wall Street pros fear that the wild pops that add tens of billions of dollars in value in mere minutes are signaling an unhealthy market reminiscent of the dot-com era.
“If any one of these deals falls through it has this domino effect downstream that I think is concerning,” said Brian Mulberry, client portfolio manager at Zacks Investment Management Inc., which has about $12 billion in assets. “It reminds me of what happened with telecom back in the mid-nineties.”
An unwinding could be even more painful today, as the top tech stocks account for roughly 35% of the S&P 500 Index, compared with less than 15% in 1999.
“The market is pricing these deals as if everyone who transacts with OpenAI will be a winner,” said Michael O’Rourke, chief market strategist at Jonestrading. “OpenAI is a negative cash flow company and has nothing to lose by signing these deals. Investors should be more discerning. But this is a buy-first, ask-questions-later environment.”
“All the ingredients are in place for some kind of a blow off,” he said. “Will it happen again? History rhymes a lot, so I would think some version of it is going to happen again,” adding that this environment is “more potentially explosive than 1999.”
One of the big concerns about the deals is their circular capital structures, with the companies using each other’s money to buy each other’s products, Mulberry said.
In addition, the scale of the stock market moves for such large companies is alarming, he said. These are companies with “very large mature balance sheets that are participating in these types of rallies,” Mulberry said. “That is unusual, and it does cause a little bit of reflection.”
To be sure, AMD’s climb may be justified because the OpenAI deal signifies a major step in its progress with graphics processing units, or GPUs, where it competes for market share with Nvidia. Wall Street analysts covering AMD generally cheered the news.
Still, having multiple large technology stocks surge by double-digits in quick succession could be a sign that valuations have become disconnected from underlying fundamentals, and that investors are buying primarily based on the fear of missing out on further gains.
A company that large, gaining so much market value that rapidly is “not good and normal,” he added. “I would call it a part of the exuberance bundle.”
