It is a fool’s errand to try and time the stock market. However, with warnings of a possible stock market correction coming from the Bank of England and JP Morgan in recent days, now may be a good time to explore ways to diversify your investments to hedge against the risks.
Is there an AI bubble?
The growth of technology and AI in recent years has resulted in an increasing dominance of the US stock market by a handful of major technology firms.The “magnificent seven” tech stocks of Microsoft, Apple, Alphabet (Google), Amazon, Meta (Facebook), Nvidia, and Tesla now represent more than a third of the market capitalisation of the S&P 500 index, rising from around 20 percent five years ago.
A large part of the growth of these companies has been based on the development of artificial intelligence, with Nvidia a particular beneficiary due to the unique processors they produce that have become the backbone of much AI processing.
The fears about an AI bubble come from the increasingly rapid growth of the sector, with investment pouring into everything related to AI. AI-related enterprises have accounted for 80% of the huge gains in the American stock market this year, and Gartner estimates global spending on AI will reach £1.1tn by the end of the year. AI has become a juggernaut that has started to eclipse all other areas of the economy.
The scale of the investments required for companies like OpenAI to continue their growth trajectory have many worried that the industry has become unsustainable. The circular funding coming from the likes of Nvidia into OpenAI, which is one of the biggest buyers of its GPUs, has deepened the concern.
The case against an AI bubble
Whilst some high profile figures have warned of an AI bubble, including OpenAI’s Sam Altman, and there are some overvalued tech stocks, there is no consensus on when or even if a correction may arrive.
Unlike the dotcom boom in 1999/2000, the price-to-earnings (P/E) ratio of many of the major tech stocks such as Apple, Amazon, and Google are between 25 and 35. Even Nvidia’s P/E ratio of 50 remains significantly below the 200 peak of Cisco before the dotcom crash and global economic turmoil that followed. Tesla’s P/E ratio is an outsider amongst the tech titans, not the norm.
However, whether there will be a major correction of a bubble bursting, a crash due to changes to US import tariffs and policies, or just a cyclical dip, it is always good to have a diversified investment portfolio that can help you weather the storm.
Where to diversify your investments
A major stock market crash like those experienced during the dotcom crash of 2000 or the financial crisis will impact almost all investments in some way. However, moving some of your investments outside of the stock market should offset some of the risks involved.
Traditionally, property, gold and bonds have been where people have chosen to invest when they fear an upcoming correction or recession. However, the price of gold increased by over 1,000% between 2000 and 2025, and whilst many are still choosing it as an alternative investment vehicle, others say it may be in its own bubble that is ready to burst.
Government bonds or gilts, in particular US Treasury Bonds, have also long been a popular hedge for investors. However, these are not immune to global events, and Trump’s introduction of tariffs earlier this year sparked a major sell-off of US government debt that has made such investments feel less secure.
Property has long been a popular investment option for those in the UK who want to generate returns outside of the stock market. But with the recent changes to both tax policy and regulations around buy-to-let, it has become harder to generate strong returns from UK property for smaller investors.
Property itself, however, remains a good way to diversify your investments. And with Housemartin, we take care of all the hassles and administrative burdens associated with renting out residential properties and instead deliver a reliable, inflation linked income every month of up to 7.5%.
If you would like to explore investing in UK residential property, sign up to Housemartin today.