Is AI the Next Stock Bubble? GQG Partners Thinks So

GQG Partners has raised concerns over the soaring valuations in the AI market, warning that this could lead to instability within the S&P 500. Their recent four-part report describes the AI trade as a bubble on the verge of bursting. This isn't a mere partnership announcement. It's a convergence of financial peril and technological advancement.

Bubble Warning

Siddharth Jain, co-manager of the GQG Partners Global Quality Equity Fund, underscores the risks. He argues that if AI capital expenditures even decelerate, forget about contracting, the ramifications could be significant. Recent data suggests that over half of last year’s U.S. GDP growth was attributed to AI capex. A slowdown could trigger a domino effect impacting stock market-linked income cohorts.

Jain notes that while GQG has historically been bullish on tech, the current risk is too glaring to overlook. The AI-AI Venn diagram is getting thicker, and not in a good way. Unrealistic expectations have inflated market valuations, with investors banking on double-digit earnings growth. The valuations of firms like OpenAI and Anthropic only add fuel to this speculative fire.

Risks and Defensive Strategy

Jain points to hyperscalers, which are outspending even the energy sector at its peak in capex dollars per EBITDA. This aggressive spending is unsustainable and could mean negative cash flow for major AI players. The circular financing practices, notably Nvidia's Q4 2025 deals to fund customer purchases, mirror the telecom bubble’s worst practices.

In response, GQG Partners has pivoted towards defensive stocks, focusing on sectors like healthcare, utilities, and consumer staples. These sectors are as attractively priced as they've been relative to the top 750 stocks since 1990.

Top Defensive Picks

Among GQG's top picks is insurance giant Progressive, trading at a low 12-times forward earnings. Such pricing hasn't been seen since the peak of the dot-com bubble. Jain also highlights Philip Morris, benefiting from a resurgence in nicotine volume growth thanks to products like IQOS and Zyns.

Finally, Jain supports American Electric Power, citing its role in the ongoing capex cycle driven by regulated utilities. A 3% dividend yield coupled with accelerated growth yields a 12% compounded return, akin to holding a bond. The compute layer needs a payment rail, and these stocks could provide it.

If AI investments falter, who holds the keys to market stability? GQG Partners believes the answer lies in defensive and durable industries.