AI rally close to peak if Nvidia is proxy – Morgan Stanley

Morgan Stanley analysts weighed in on the artificial intelligence (AI) frenzy that has fueled the Wall Street rally in 2023.

Morgan Stanley’s analysis shows that bubbles tend to rally a median 154% in the 3 years pre-peak, and 217% on average. The firm uses December 2022 (the launch of ChatGPT) as the start of this rally.

“The first derivative AI winners have rallied over 200% YTD, yet broader AI Indices are up a more modest c50% YTD and not yet above prior 2021 highs,” the analysts said in a client note.

They also highlighted two ways of looking at the current rally, when compared with other rallies historically.

“If we use NVIDIA (NASDAQ:) or US Large Cap Tech as the proxy – tactically this rally would be in its later-innings: The performance of both single stocks or the narrow grouping have returned >200% YTD. Consequently, with typical 3-year returns into bubble peaks of c150%, one could argue that this rally surpasses most others,” they added.

On the other hand, this rally “has been more modest,” if one uses leading AI indices as the proxy.

“Returns YTD for the leading AI Index has been a more modest 50% versus the median rally of more than triple this. We concede this figure may be too low though. The 2023 AI rally is starting from a higher base given the 2021 AI performance – part of the “everything bubble” rather than being idiosyncratically driven – had not fully reset before this latest inflection started,” the analysts concluded.