Fear of an AI bubble, falls in ASX share prices and rates jitters – what’s going on with the Australian market?

Global share markets – including in Australia – were plunging before the world’s biggest company, US chip maker Nvidia, reported a soaring profit and upbeat outlook, soothing jittery traders. Yet the results will spark further discussion on whether the market optimism around artificial intelligence is justified. But is it a bubble getting ready to burst? And why is the Australian stock market affected? Related: Nvidia earnings: Wall Street sighs with relief after AI wave doesn’t crash What caused falls in the Australian market? The Australian market has been led by Wall Street, where there are enduring concerns the AI-fuelled run by technology stocks may have gone too far, too fast.  While the Australian Stock Exchange (ASX) is dominated by banks and miners – and not big tech – it had profited from the upbeat sentiment that propelled the Australian and US markets to record highs before a recent selldown. Australia’s benchmark S&P/ASX 200 hit a record 9,115 points in October before quickly shedding about 7%. Sign up: AU Breaking News email The ASX has erased some of those losses after a strong start to Thursday’s trading session, fuelled by Nvidia’s 65% year-on-year profit increase to US$31.9bn, reported shortly before the start of the Australian trading session. The recent shakeout occurred at about the same time traders lost confidence the US Federal Reserve would deliver a rate cut in December amid rising inflation concerns; the same dynamic that has dimmed hopes for further cuts in Australia. Rate cuts are generally seen as a stimulus for stocks because they make money cheaper for companies to borrow and allow consumers to spend more. Omkar Joshi, the chief investment officer at Sydney-headquartered Opal Capital Management, says Australia has shifted from a country expecting rate cuts to one where the next move may even be a rise. “That’s quite a different place to be sitting relative to where we were only a few months ago; we’ve moved from risk on to risk off,” Joshi says.  “The worries are we have rate cuts coming to an end and rates might even go the other way.  “There’s weakness for the US consumer and weakness in the US housing market, so weaker overall trends. Against that backdrop, you had a market that was pushing all-time highs and valuations were pretty stretched.” Related: ‘We excel at every phase of AI’: Nvidia CEO quells Wall Street fears of AI bubble amid market selloff What has actually gone down in the ASX? In Australia, it has partly been a case of stock prices that went up the fastest have also fallen the fastest. For example, the price of shares in the country’s biggest listed company, Commonwealth Bank, rocketed more than 30% between March and June, before suffering a double-digit decline amid concerns over its high valuation. Australian technology stocks have been particularly volatile, with wild swings in TechnologyOne, WiseTech Global and location-sharing app Life360. Lochlan Halloway, an equity market strategist at Morningstar, describes the market as “modestly overvalued”. “It just seems investors are bidding up in multiples, in that they are paying more for the same things,” he says. “We have run in sympathy to the US, and risk assets have done well.  “But these are two fundamentally different markets; in the US the story is all about AI and the potential returns that come out of that.” Investors have had few hiding spots in the recent market decline. The value of crypto assets, including bitcoin, have been savaged in recent weeks after being caught up by the growing fears around a market bubble. Tony Sycamore, market analyst at IG Australia, describes the slide in bitcoin – from its US$126,000 high in October to US$90,000 – as the “canary in the risk coalmine”. While gold has also dropped from its October highs, it has recovered some of those losses in recent days. Gold was famously the standout asset of the 1970s, a period market by persistent inflation and rising unemployment, which some fear will once again grip the US economy. Is there an AI bubble? Investors use different metrics to form a view on what constitutes a bubble, such as price-to-earnings ratios which show Australian stocks are expensive compared with historical averages. The tricky thing about bubbles is that even if an investor is sure there is one, they rarely burst when people expect them to. This was the case in the infamous dotcom crash. By early 1999, many market watchers were describing internet stocks as being in a bubble. But the tech-heavy Nasdaq promptly doubled in value, creating regret for those who sold out, and pain for those who bet against it. The bubble started to pop in March 2000. Veteran financial markets commentator Michael McCarthy says there are lessons to be learned from the tech wreck in today’s AI-led boom. “What often happens at the beginning of a new industry, and in my mind we’re definitely looking at the beginning of a new industry, is initially markets vastly overestimate the potential,” says McCarthy, from online trading platform Moomoo.   “Then markets crash, and there is a long period of underestimation, before the industry starts to prove itself.” He cites Microsoft and Amazon as two examples of stocks that were sold down heavily in the tech wreck before proving to be titans of their industry. McCarthy says he expects the current volatility is part of a “big shakeout” that will eventually offer up investment opportunities in the AI sector. “The danger in the market at the moment is that if it unwinds, it could get very nasty,” he says.  Many traders will look for a “blow off top” – a final, rapid surge in prices – to announce the end of a boom and beginning of a bust.  There are different views on whether that has already occurred or, of course, whether there is even a bubble at all.