Published June 12, 2026
Below are a couple of recent writeups regarding the stock market’s efforts to value the enormous cost and opportunity of AI.
“Initial public offerings of AI giants were seen by many investors as a can’t miss opportunity, but it’s little wonder markets are getting cold feet. They look like extreme long shots when you apply a common sense statistical test to them. So do many stocks that are already listed.
The usual retort in a bull market for the new-new thing is that skeptics “don’t get it.” Yet a time traveler dropped into the peak of the dot-com bubble wouldn’t have had to know anything about that transformative technology. They’d only need to have studied stock-market history to guess that a few of the era’s highfliers might be worth owning, but almost certainly not most of them.
Say it was a hot spring in New York and you wanted to place a bet on Polymarket about the temperature reaching 100 degrees in Central Park this month. The first thing you would do is look up climate records and note it hasn’t happened for 60 years. The mercury has hit triple digits just three times, or on 0.06% of June days since 1869. Even with a nod to global warming, you wouldn’t—or at least shouldn’t—give it much higher chances.
A smart report by Morgan Stanley Investment Management’s Michael Mauboussin and Dan Callahan, “Bayes and Base Rates,” focuses a similar lens on AI. Making a return on the vast sums being invested, which already exceed the railroad or internet booms, assumes sales growth unlike anything in history.
OpenAI’s projection last year that its revenue would rise to $145 billion by 2029 required compound annual growth of 108% for five years. That’s never happened before, based on a sample of almost 19,000 large companies, according to the authors. They admit that base rates “can change as the world changes.”
If you set a lower bar, then the chances of clearing it rise. Palantir, Broadcom, Nvidia, Intel and Alphabet were among nearly 70 U.S.-listed companies that fetched a multiple of at least 10 times trailing revenue at the start of this week.
That isn’t an insurmountable hurdle, but it’s trickier if you’re counting on them beating the market as a group. History says you probably have to pick the right stocks.
Asset manager GMO noted at the end of last year that a higher share of the U.S. market fetched above the 10-times threshold than at the peak of the tech bubble. Earlier, they looked at the performance of stocks trading above the threshold across 40 years. Buying just that group would have left an investor with 80% less money than an S&P 500 index fund, taking inflation into account.
The higher the multiple, the bolder the bet. The next IPO up, SpaceX, already priced its shares at 92 times sales. Are you feeling lucky?
Two charts below causing some investors angst earlier this week. The first showing the relative valuations of the high-flying semiconductor sector to the broader market.
The second showing that the “hyperscalers” – e.g the companies spending billions to build and secure data center capacity – are draining their free cash flow. The stock market has had a difficult time figuring out how to value this enormous investment in capacity for what is, at this point, an unproven gain. Recent announcements of stock issuance by Alphabet and others to fund this spending has amped up the concerns.
How will this all play out?
Market Update
Coming off a -4% drubbing in the Nasdaq the prior Friday, stocks staged a bit of a bounce back Monday. But the recovery was only a very modest +0.9% in Monday’s session as chip stocks found dip buyers. That was given back Tuesday on word that Iran had shot down a U.S. helicopter. With an end to the tensions seeming further away, investors cut risk. That tone accelerated Wednesday with President Trump vowing to retaliate for the downed helicopter. In what has become a familiar pattern, oil prices and interest rates pushed upward pressuring stocks to a -2% loss. Further adding to the gloomy tone was a monthly inflation report showing the measure of prices higher by +4%, well above the Fed’s 2-3% target. However, the rise in inflation was widely expected and was overwhelmed by the war news. Within 24 hours, Trump had backtracked on some of his retaliation threats luring buyers back into the market. Stocks immediately ripped upward by +2% with interest rates falling back. Friday was dominated by the debut of SpaceX in the largest IPO ever. The stock brought a welcome burst of enthusiasm to the market though by day’s end the indexes were only modestly positive.
A volatile week saw stocks come back from the brink of a harsh selloff as war news drove whipsawing trade. The S&P 500 closed with a +0.57% weekly move. The Nasdaq bounced back from the prior week’s downdraft with a +2.31% rebound. Small cap stocks rose to an all-time high on strength in financial shares. The index added a hefty +4.01%.
Warm wishes and until next week.