There are several indications emanating from investment markets that indicate the valuation of companies involved in the generative artificial intelligence (GenAI) sector may have peaked, according to a global fund manager.
Morgan Stanley Investment Management international equity portfolio manager Anton Kryachok identified the market conditions at the beginning of this year as the basis of forming this view.
“At the start of 2025, stock market valuations remained elevated, with the MSCI World Index multiple at 19 times, even without accounting for the Magnificent Seven [Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla], and margins around record highs. US multiples looked particularly stretched with the market concentrated in a small number of perceived GenAI winners,” Kryachok said.
“In our view, this indicates GenAI stocks may be nearing their pricing peaks. Investors only need to consider the impact of DeepSeek’s unexpected AI model release, which is built on a comparatively shoestring hardware budget, to see how fragile stock markets are and how dependent US and developed market returns are on a small number of large technology companies, which have dominated gains.”
He also warned investors to be wary of the significant levels of AI investment, which in turn are expected to deliver efficiency gains for the organisations involved, but may well not materialise.
According to Kryachok, this scenario could undermine ambitious earnings expectations built into many US stocks.
Given these factors, he suggested implementing a more traditional investment approach should help navigate this shifting landscape with regard to investing in GenAI entities.
“Whether we’re evaluating a leading technology company or a leader in any other sector, our approach is grounded in identifying the high-quality fundamentals that drive long-term compounding. Once we believe the quality foundations are in place, we dive deeper, assessing the strength of the franchise and the ability of the management team,” he explained.
With reference to investment opportunities still present in the GenAI space, he nominated select hyperscalers or large cloud service providers and IT service companies active in the sector as organisations on which to focus.
“We see opportunities and invest in a significant number of data-centred companies, such as credit bureaus, information service providers, exchanges and businesses with significant amounts of proprietary data. In combination with their strong pricing power, we believe these companies should be able to identify cost opportunities to monetise AI and, crucially, retain the benefits,” he said.
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