Sigma Clarity Analysis: Why the AI Stock Rally Is Not a Dot-Com Bubble
Idan Azoulay of Sigma Clarity argues that the AI rally is not a classic bubble, advising investors to target physical infrastructure. Meanwhile, he urges caution in Israeli bonds and real estate.
AI Market: Bubble or Structural Revolution?
Is the artificial intelligence (AI) market inside a bubble waiting to burst, or is it a genuine economic revolution in its infancy? Idan Azoulay, Chief Investment Officer at Sigma Clarity investment house, presents a perspective in his economic review that diverges from common market anxieties, suggesting that the surge in technology stocks does not necessarily indicate a classic bubble.
According to Azoulay, while investors grapple with concerns over high valuations of tech companies driven by AI enthusiasm, a significant portion of the sector's stocks has already undergone sharp corrections. Applied Materials, for instance, has dropped approximately 40% from its peak, while SanDisk is trading nearly 30% below its record high.
Recent financial reports from Broadcom also provide a reason to re-evaluate the claim that the AI boom is over. The company, with a market capitalization of about $1.7 trillion, reported 86% revenue growth and a 221% surge in AI chip revenue. These growth rates are reminiscent of much younger firms.
Nvidia also continues to deliver exceptional performance, with revenue growing by 106%. Both corporations demonstrate an extraordinary ability to maintain rapid growth despite their massive scale, defying the economic principle known as the law of large numbers, which dictates that maintaining high growth rates becomes increasingly difficult as a company expands.
Broadcom even raised its guidance for the coming years, projecting its AI-related revenue to reach $230 billion by 2028. Despite this forecast, the company's stock declined following the report and remains below its peak. For Azoulay, this is a key indicator that the market is not behaving like the dot-com bubble era, when stock prices rose indiscriminately regardless of underlying business risks.
The Shift to Physical Infrastructure
One of the central messages of the review concerns the next phase of the AI revolution. According to Azoulay, the industry's bottleneck is gradually shifting from software to the physical world. As models improve and adoption expands, there is an escalating demand for computing power, cooling systems, optical communications, electricity, and hardware infrastructure.
Concurrently, AI is entering other physical domains, including robotics, logistics, and biological drug discovery. Consequently, the investment house believes the next wave of capital expenditure may focus not only on software and model developers but also on companies providing the physical infrastructure required to sustain the revolution.
Domestic Context: Bank of Israel and Global Pressures
On the domestic front, the review addresses the Bank of Israel's decision to cut interest rates by a quarter of a percentage point, a move that surprised markets. The decision was based on a moderate inflation environment but was made against a backdrop of significant geopolitical uncertainty.
The Bank of Israel noted that Israel's risk premium has decreased to levels recorded prior to October 7, 2023. However, ongoing tensions in the Middle East continue to pose risks to energy prices and global supply chains.
Azoulay raises a critical question: can Israel truly decouple from global economic pressures? He notes that the 7.2% increase in the global food price index since the beginning of the year could eventually impact the Israeli economy.
Developments in the Persian Gulf also occupy a significant place in the analysis. According to the review, disruptions in the Strait of Hormuz damage the global supply of various resources, including fertilizers, natural gas, helium used in the semiconductor industry, and oil. The consequences could eventually feed into commodity prices and inflationary pressures.
Caution in Bonds and Real Estate
Despite the interest rate cut, the local bond market did not react with enthusiasm. Long-term yields rose slightly, indicating that the market is not currently pricing in a rapid series of further rate cuts.
Accordingly, the investment house recommends maintaining a conservative approach in the debt market. According to the review, the risk-reward ratio is not attractive enough to justify increasing risk or extending the average duration of the bond portfolio.
An equally cautious stance is maintained regarding the residential real estate market. Sigma Clarity states that at this stage, they prefer to avoid holdings in the sector, at least until the inventory of unsold apartments drops significantly from the current level of over 80,000 units toward approximately 50,000.
Ultimately, Azoulay's message to investors is not to shy away from the AI revolution, but rather to view it through a broader lens:
"If we are not in it, we won't exist at all. Be there."
He emphasizes the need to look beyond chipmakers and software developers, urging investors to examine energy, infrastructure, cooling systems, and telecommunications. Conversely, in the bond and real estate markets, the recommendation remains one of patience, conservatism, and rigorous risk assessment.
