The artificial intelligence market rally could be another example of a “big market delusion” such as the dotcom bubble in 1999 and ESG boom in 2020/2021, according to Rob Arnott, founder and chairman of Research Affiliates. And AI market leader Nvidia NVDA, is not in an unassailable position—despite its spectacular share price growth in 2023 and 2024 and forecast-beating results.
Speaking at a Morningstar event in London, Arnott, the renowned value investor and market commentator, laid out his AI concerns.
“A big market delusion is a special kind of bubble … it’s when a new industry is being created,” he said. “We have to be careful in assuming that a massively disruptive technology [like AI] is going to be a money machine in the future.”
He argued that AI retains the power to transform society, especially the world of work.
But today’s stock winners in the space are likely to be supplanted by new entrants into the industry or existing competitors keen to grab market share.
“It’s not that the narrative is wrong … where the narrative is wrong in saying all of these companies will succeed and won’t be disrupted.”
Arnott has previously spoken of the dangers of excessive index concentration in the US, and has argued against market capitalization weighting. And noted the continual churn in the S&P 500’s “top stocks” in the index over every decade.
Nvidia Stock Price
Source: Morningstar Direct. Data as of March 18, 2025.
Nvidia is a Money-Making Machine
Arnott said that Nvidia, which was briefly the largest company in the S&P 500 at the start of 2025, is a “money machine” with vast sales and profits. In the most recent quarter, Nvidia posted revenue of $39.3 billion, up nearly 80% year over year.
But it must work hard to protect its competitive advantage, he added, especially with so much money at stake.
Wide-moat Nvidia shares are down nearly 17% year to date despite strong quarterly earnings, but more than 2,000% over the last five years. According to Morningstar metrics, the stock is slightly undervalued at $115, against a fair value estimate of $130. “We think the market is pricing in both the tremendous potential for Nvidia’s artificial intelligence solutions and the risk of slower spending on such products beyond calendar 2025,” Morningstar analyst Brian Colello said after the latest earnings report in February.
As well as Nvidia, former high-flying Magnificent Seven stocks have fallen this year in the tech market shakeout.
Tesla Stock Price
Source: Morningstar Direct. Data as of March 19, 2025.
Tesla Stock: A Breakout Year, Then a Struggle
Referencing Nvidia’s current dominance, Arnott cited the example of former hot Tesla TSLA, whose stock rose nearly 800% in 2020 but has struggled in the intervening years as EV adoption has slowed and governments have moved targets for the phaseout of petrol and diesel cars.
“The narrative was: we’re all going to be driving electric vehicles,” he said. And then investors realized that this revolution will now take much longer to be realized, with the focus now on autonomous vehicles instead.
“The notion that Tesla would be invulnerable to competition was utterly naïve,” he said, noting that Japan’s Toyota 7203 remains the biggest seller of vehicles in the world.
However, Morningstar analyst Seth Goldstein says that the market assumption on EV sales is too pessimistic. In a note on Tesla’s latest earnings, he wrote:
“While we generally agree with consensus on global EV adoption, we’re more bullish than the market on many companies in the EV supply chain. The market disconnect between the macro growth and company valuations creates strong opportunities for investors.
“We forecast EVs will account for one in three autos sold globally by 2030, up from just under 14% in 2024.”
Tesla shares are currently trading below their fair value of $250 at around $230.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
