Here’s what I’m doing in case there’s an AI stock market crash

Is the stock market going to crash, triggered by an AI bubble bursting? Yesterday (18 November), even Sundar Pichai, CEO of Alphabet (NASDAQ: GOOG) and its subsidiary Google, got in on the question via a BBC interview.

Dare I mention that old dotcom boom and bust again? I know oldies like me keep banging on about it. But if we don’t learn the lessons of the past, we’re sure to repeat them, right?

Speaking to BBC News, Pichai said: “We can look back at the internet right now. There was clearly a lot of excess investment, but none of us would question whether the internet was profound.”

He added: “I expect AI to be the same. So I think it’s both rational and there are elements of irrationality through a moment like this.”

He’s not alone

OpenAI CEO Sam Altman recently aired similar views: “Are we in a phase where investors as a whole are over-excited about AI? My opinion is yes. Is AI the most important thing to happen in a very long time? My opinion is also yes.”

Both seem to think some investors are going to lose money. And I fear some could lose rather a lot.

So what’s the answer? Pichai again: “I think no company is going to be immune, including us.“

But he also believes Alphabet’s in a better position than many to come through any pending storm.

Stick with the biggest?

So one option is for AI investors to stick to the big players. Remember the way Amazon crashed last time, but went on to reach valuations many times in excess of its dotcom peak?

Does Alphabet have the same kind of outlook now? The stock’s nearly doubled in the past eight months. But forecasts still put the year-end price-to-earnings (P/E) ratio at only around 27. It’s maybe a bit high, but it’s far from stratospheric so could be one to consider.

Different now

Before the stock market crash of 2000, we had silly high dotcom P/E multiples, up in the hundreds or even thousands. And that’s not really happening this time — well, perhaps with the exception of Tesla and its P/E of 320.

Saying that, today’s Magnificent 7 forecasts are largely based on expectations of accelerating AI spend. And if the wheels come off that, earnings forecasts would surely drop. And P/E multiples could start to look precarious.

Still, buy the big players in the business like Alphabet, the ones that can sit out any crash… and sit it out with them. That’s got to be a strategy worth thinking about.

Another way

But I’m doing something different. I don’t own any AI stocks and I’m not going to buy any. That’s a repeat of my successful strategy that got me through the dotcom bubble smiling.

Will all companies suffer in the event of an AI meltdown as Pichai reckons? I can’t see Lloyds Banking Group or housebuilder Persimmon being pained too much. Remember folks, there are two kinds of stocks out there: AI ones, and all the rest.

And never forget one key thing. Diversification’s the long-term investor’s friend.

The post Here’s what I’m doing in case there’s an AI stock market crash appeared first on The Motley Fool UK.

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Alan Oscroft has positions in Lloyds Banking Group Plc and Persimmon Plc. The Motley Fool UK has recommended Alphabet, Amazon, Lloyds Banking Group Plc, and Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.