Wolfgang Klein explains why this moment doesn't resemble the dot com crash and how advisors can push back on pessimism
Wolfgang Klein doesn’t think we’re in a bubble. For all the talk of tech stock valuations, the AI trend, and a lack of revenues being generated from companies’ AI investments so far, the Senior Portfolio Manager and Senior Wealth Advisor with Canaccord Genuity Wealth Management argues that the market is not showing him signs of a bubble.
Klein explained why he believes the US stock market and the AI theme within that market are still viable. He emphasized the role of underlying cash flows and highlighted areas where markets have punished some of these names for going out over their proverbial skis on the AI spend. He argues that this pricing is currently rooted in a realistic view of generative AI’s potential and the value it can drive.
“The fact that people are asking if it's in a bubble means we are not in a bubble yet,” Klein says. “Overlaying the 90s tech boom with the AI boom, comparing Cisco to OpenAI we’re probably right now sitting around where we were in 1996, so there are maybe four more years in front of it. AI is still a very investable theme, and a very real theme, that’s still in its infancy.”
Klein notes that investors are already paying close attention to CapEx on AI projects from big names. While some of these ‘hyperscalers’ have been rewarded for the amounts they’ve spent on data centres and Nvidia GPUs, certain companies have run too far and the market has punished them. Just recently, Meta saw its price fall on the back of an unwelcome amount of AI spending, which Klein believes shows a market that is not just rewarding companies for their investment, but watching for the ways revenues will eventually be brought in through AI software.
Market fundamentals and sentiment also play a role in Klein’s outlook. He argues that since we are in a rate cutting cycle in the US, some of the leverage these firms are using to make their AI infrastructure investments is getting cheaper. Not to mention that a cutting cycle is broadly supportive for growth stocks. He contrasts those market fundamentals with a pervasive narrative that we are in a bubble. That negativity, he says, is so common that it has him discounting the arguments being made because, as he says, “whatever’s common is always wrong.”
Another commonly cited argument against the AI theme is that it’s become too concentrated, with the major AI-connected names comprising around one third of the total market cap of the S&P 500. Klein notes, however, that this year those names have actually lagged the remainder of the S&P 500, moreover he notes that in terms of sector weights the S&P 500 remains less concentrated than many other global indexes.
Perhaps his most vociferous argument for these names is that for all the noise made about their earnings multiples and stock prices, they continue to make money. Even those hyperscaling companies like Apple, Amazon, and Microsoft investing hugely in AI have enormous revenues from other channels, often to the tune of billions of dollars per week. While some have bandied about comparisons with Nortel, Klein says that in this case we’re looking at more sustainable multiples and real cash being brought in, not “100 times earnings with smoky accounting.” The sheer scale of these companies, he notes, also allows them to buy up competitors and possible disruptors to their AI models.
For all his positivity about the market, or at least rejection of negative prevailing narratives, Klein argues that he doesn’t try to forecast. Instead he tries to pay close attention to markets, understand what’s working, what isn’t, and what’s changing. It’s an ethos that he espouses on his radio show and podcast on HiFi Radio in Toronto. At the moment, markets are telling him that things are good. He accepts, however, that many clients will fixate more on negative narratives than positive facts.
“I basically say, you know something, stop it. Go live your life. Stop watching the media. Stop getting negative. The trend is your friend. The facts are the facts,” Klein says. “There's reason to be grumpy out there as an average person. Because it's expensive, the cost of living is at an all-time high, it's more difficult now to get by. However, we are so stupid as a people because we as a people have never had it any better than we have it today… there are things that are working and things that aren't working. So pay attention to what's working as a financial advisor.”
