Boom Or Bust? What 'AI Bubble' Burst In US Could Mean For Indian Stock Market?

Wall Street's artificial intelligence (AI) bellwether, Nvidia, reported strong third quarter earnings last week, posting a double beat with revenue of $57 billion and an EPS at $1.30. The AI chip giant commands a market cap of $4.3 trillion after having hit the coveted $5-trillion mark earlier this year.

Nvidia shares, up 38% year-to-date, have retreated 10% since hitting a record high in late October. The Q3 results helped restore a tentative sense of calm after weeks of heavy selling in tech stocks, as investors grew uneasy about stretched valuations and fading prospects for near-term rate cuts.

Shares of Nvidia are down 5% this month after a recent selloff due to concerns of 'AI bubble' troubling Wall Street investors. The 'AI bubble' essentially refers to the possibility of the AI boom having outrun the fundamentals, where the stock valuations of AI-linked tech companies are seen as inflated as compared to their profits and revenue.

With sentiment still cautious and the scrutiny of tech spending intensifying, the interpretation of Nvidia results remains crucial. Notably, the world's most valuable company by market cap, has been at the heart of a rally that has carried global markets to all-time highs and lifted any stock with links to AI.

Nvidia's 8% weighting in the S&P 500 index and its market leadership in AI give the results added significance. The stock influences the tech-heavy Nasdaq, including the Magnificent Seven titans such as Meta, Alphabet, Apple, and others. If the AI bubble bursts, Wall Street may witness a crash which could have spillover effects to other markets too, including India.

Wall Street analysts said the most notable aspect of Nvidia Q3 report was its upward revision of its future guidance to revenue of $65 billion for the next quarter, suggesting the company sees continued strong demand ahead. The strong forward guidance, importantly, helps reduce the uncertainty in the sector, as investors will feel more comfortable with exposure to the sector, knowing that Nvidia sees sustained growth.

Analysts believe that Nvidia is a bellwether for the broader AI ecosystem, and its strength suggests that demand for AI remains solid, which in turn supports related stocks and sectors. The stock has surged 1,200% in the past three years.

"Given the recent concerns in the market around valuations in the tech/AI space and questions about whether the AI bubble might be overstretched, these earnings come as a timely relief to the markets," said Ross Maxwell, Global Strategy Lead at VT Markets.

"The caveats to the positive report will be that if future quarters don’t continue to accelerate, sentiment can reverse quickly. Also, while Nvidia’s success is encouraging, it doesn’t guarantee that all companies in the AI space will be able to replicate, especially those companies with weaker competitive position," added Maxwell.

Wall Street sees increased volatility over several triggers. While there are valuation concerns in AI stocks with many experts warning of a bubble burst, the Nvidia CEO disagreed with this cautionary warning with the statement “we see a different picture characterised by sustainable rise of advanced AI systems.”

"At lower valuations, fresh buying may again emerge in AI stocks. We will have to wait and see how this volatile phase unfolds. There is excessive speculative trading in many stocks in India, particularly in some newly listed stocks," said Dr. VK Vijayakumar, Chief Investment Strategist, Geojit Investments Ltd.

As per the expert, retail investors better avoid such speculative trades which usually end in tears for the vast majority. The ideal investment strategy now would be to buy fairly-valued high quality stocks on declines and wait patiently.

"Since India has been an under-performer in this year’s AI trade, India will benefit if the AI trade fades and money starts flowing into non-AI stocks in counties like India. But a big crash would impact all markets. So wait and watch how things unfold," added Dr. VK Vijayakumar.

D-Street analysts note that currently, valuations in US are astronomical for Nvidia and other AI stocks listed on Wall Street. As of now, the key trigger for the market is balancing of valuations. Sometimes markets are fringy and sometimes frothy due to a mismatch of valuations and trade, as per experts.

However, India is fairly insulated from the AI bubble burst and a potential spillover from a crash in megacap tech stocks, according to Kranthi Bathini, Director - Equity Strategy, WealthMills Securities Pvt Ltd. The impact on the Indian stock market will be relatively lower compared to other global markets. Overall, the impact seems nominal. On a medium-to-short term, we are looking at a sentimental impact on Indian markets," said Bathini.