- The bubble in tech stocks still has a few years to go before it bursts, tech analyst Gene Munster said.
- The leading technology analyst told BI that he thinks the Nasdaq could fall as much as 30% when the bubble deflates.
- Top hardware stocks like Nvidia will probably face the heaviest losses, he said.
The stock market’s technology-driven rally has a few more years to go before the air blows out of investors’ favorite trade.
That’s according to Gene Munster, a senior technology analyst and managing partner at Deepwater Asset Management. Munster thinks artificial intelligence has fueled a huge tech bubble, and it probably has two more years before it bursts, he told Business Insider.
The bust — which Munster sees coming in 2027 — could result in the Nasdaq Composite dropping as much as 30% as growth slows and the AI train runs out of steam.
When the dust clears, the market’s top hardware stocks, such as Nvidia and other chip makers, could end up seeing the heaviest losses, he predicted.
“I agree that Nvidia will have a day of reckoning — and the chip stocks, the whole trade. And the question for us is not, ‘Will the bubble burst?’ It’s, ‘How high are we going to go before the bubble bursts?'” Munster said.
Munster thinks two to three years is a reasonable timeframe for the tech trade to continue to grow, given that AI is “changing the paradigm” and that there are still more benefits to come from AI.
“AI today is mostly a buzzword for most people. They don’t actually use it. Businesses are talking about implementation, most of them aren’t. And when the core of that starts to affect businesses, margins have to go up, profits go up “, he said.
At the same time, the market is flashing signs that the extraordinary growth seen in 2024 will not be repeated in the coming years. The Nasdaq gained 29% last year, driven largely by the AI craze.
Nvidia, Apple, Amazon, Alphabet and Broadcom — five tech stocks that have been the face of the AI trade — accounted for 46% of the S&P 500’s total return last year, adding about $6 trillion in value, according to Goldman Sachs.
Meanwhile, growth expectations for technology stocks outpace expectations in other areas of the market. The Magnificent Seven group is expected to see revenue growth of 33% in 2024, Goldman added, although other stocks in the S&P 500 are expected to see only 3% earnings growth.
However, the mega-cap tech group’s earnings are set to decline in the next two years.
The Magnificent Seven is expected to see revenue growth of 33% for 2024. FactSet/Goldman Sachs Global Investment Research
Investors are also feeling let down if they think that high market prices can continue to deliver sustained outperformance.
Munster pointed to Nvidia, the chipmaker that has grown more than 2,000% in the past five years but has struggled to please investors in recent quarters despite its solid results.
Munster predicted that investors will see the bubble begin to pop when Nvidia and other hardware stocks begin to fall away from investors’ expectations by wider margins, causing jitters in the market and, ultimately, a softening of technology trade.
“It’s just any small variation in that growth rate. It’s so analyzed, it’s going to have a big impact on the overall market,” he added. “Growth will — mathematically, it should slow down, and when that slows down … then that’s the point where I think you start to see, at least the hardware part of the trade, come undone.”
Warnings of a potential stock market bubble have surfaced on Wall Street, with some forecasters warning of a significant correction as excitement about AI reaches a boiling point. Still, most strategists see stocks enjoying another year of gains, albeit at a slower pace than in 2023 and 2024.
