The S&P 500 is hovering near all-time highs, and by most measures, U.S. equities are expensive. According to analyst Joachim Klement of Panmure Gordon, the cyclically adjusted price-to-earnings (CAPE) ratio, when adjusted for above-trend earnings, may be at an unprecedented 68—higher than during the dot-com bubble. This suggests a price bubble on top of an earnings bubble, driven largely by a handful of AI-focused tech stocks.
The Challenge of Timing Bubbles
Bubbles are notoriously hard to time. Economist John Maynard Keynes famously noted that markets can remain irrational longer than you can remain solvent. Flipping to 100% cash and trying to re-enter is often a losing strategy. Instead, the key is diversification: ensuring you don't sacrifice too much on the way up while building a cushion for the downturn.
Look Beyond U.S. Tech
Alexander Chartres, fund manager at Ruffer LLP, suggests that the concentration of market attention on a few AI hardware stocks has created relative value elsewhere. Chinese tech stocks, for example, trade at far lower valuations due to political risk and a subdued economic backdrop, yet they offer similar exposure to cloud computing and AI. “If you think about who provides cloud computing globally, it’s basically the U.S. and China,” Chartres said, noting that Chinese tech companies have decent revenue growth and optionality in AI, but are beaten down by weak sentiment.
Other Diversification Options
Beyond Chinese tech, investors can consider value-oriented sectors, international equities, or alternative assets like commodities and real estate. The goal is to reduce reliance on the narrow U.S. tech rally while maintaining exposure to long-term growth themes. As Chartres put it, “One of the advantages of all the market oxygen being drawn into a small number of AI-related hardware stocks is that it means the relative value in several other corners of the market looks pretty good.”
