Investor exuberance over artificial intelligence has driven equity prices beyond their intrinsic values, heightening market volatility. Yet it remains uncertain whether such optimism can be deemed “irrational,” said Howard Marks, co-founder and co-chairman of Oaktree Capital Management.
“I think it’s clear today that we have exuberance,” he said at a CIO round table in Seoul hosted by The Korea Economic Daily on Nov. 7. “Price is now above intinsic value. I think we can all agree that most assets are expsnviely priced.”
The S&P 500 index has soared 105% over the past three years to hit a record high in October. The Nasdaq index also rallied to its hishest-ever level last month.
“What elese rose 105%? Did earnings go up 105%, or did intrinsic value go up? He asked. “Is it the level of prices and investor behavior today irrational given that potential you can’t measure?.”
The Wall Street guru said it is hard to say that current investor optimism is irrational or the market is in an AI bubble.
“You can’t quantify the future. You can quantify the present. You can’t quantify prices,” based on future expectations hard to quantify, he warned.
He cited the price to earnings ratios of S&P 500 stocks, currently at about 24 on average.
The figure is below its all-time high of 32 in 2000 during the height of dot.com euphoria, which he said was a very isolcated instance and very brief.
‘MAGNIFICENT SEVEN’
He said he shared the view that AI will change the world and Magnificant Seven companies are the greatest companies he has ever seen since he entered the investment market in the late 1960s.
Magnificent Seven includes Apple, Microsoft, Google, Amazon, Nvidia, Meta and Tesla, which dominate the S&P 500 index.
Marks said theor valuations, currently in the 30s on avearge, seem moderate, adding: “Thirty seemed high but not crazy.”
However, he cautioned that qualitive assets overall are expensive today and maybe more so in the US than other places.
“We have radical fluctuations in price instead … so obviously price changes much more radically than does intrinsic value.”
