AI hype is supportive of stock valuations, but cracks are emerging elsewhere, warns Schwab's Sonders

Published Mon, Jun 17 20241:12 PM EDTUpdated Mon, Jun 17 20241:31 PM EDT

Artificial intelligence-related stocks are currently trading at rich valuations after more than a year of investor excitement for the trend. But while fundamental factors around these names are supportive of their multiples, the market isn't in the all-clear zone, according to Charles Schwab chief investment strategist Liz Ann Sonders. "AI and its enthusiasm — I think that's very legitimate," Sonders told CNBC's " Squawk on the Street " on Monday. "At this stage in the game, the trajectory of earnings, you could argue, is supportive of valuations." In contrast to the dot-com bubble, the current AI rally has much stronger fundamental factors correlated to momentum, Sonders said. She highlighted factors such as strong free cash flow, high return on equity and profitability streams. By comparison, the most highly correlated fundamental factor with momentum in the dot-com boom was negative earnings, she said. The S & P 500 hit a fresh record on Monday, brining its year-to-date gain to more than 14%. The bulk of those gains comes from major tech companies tied to AI such as Nvidia — which has more than tripled in 2024. .SPX YTD mountain To be sure, Sonders noted the significant lack of market breadth and weakness under the surface. "The market has done quite well, but most stocks have not. That kind of divergence and concentration could go on for a while. … If you're only focused on the index level games, which are increasingly driven by a smaller and smaller handful of stocks, that's a risk," she added. Sonders advised investors to engage in portfolio rebalancing to avoid concentration-related risks as market bifurcation continues to persist. "You're looking at the party of stocks and what they're doing, or just what the index is doing courtesy of a very small number of stocks," Sonders said. A weakening in consumer sentiment data also indicates broader pressures on consumption, according to Sonders. She highlighted "significant" differences between nominal and real consumer spending.