Longtime market bear David Rosenberg is reconsidering his pessimistic stance on the stock market, acknowledging that the artificial intelligence boom is forcing him to fundamentally rethink his approach to market valuations. The economist, known for his bearish predictions, admitted in a Thursday note to clients that it’s “high time” to stop focusing solely on traditional valuation metrics that suggest the market is overvalued.
Rosenberg has historically relied on comparing current stock market valuations to historical averages to argue that equities are dangerously overpriced. While veteran stock bull Ed Yardeni recently presented five charts showing valuations at historical extremes, Rosenberg now believes these elevated valuations may be justified if AI can deliver on its promise of unleashing significant productivity gains across the economy.
This perspective aligns with BlackRock’s 2025 outlook, which argues that comparing today’s market valuations to historical benchmarks is like comparing “apples to oranges” due to the fundamental transformation of America’s tech-led economy. The investment giant suggests that the AI revolution represents such a profound shift that traditional valuation frameworks may no longer apply.
A crucial factor in Rosenberg’s evolving view is the recognition that AI’s promise is extending investor time horizons beyond the typical one-year outlook. “Investors are clearly looking out beyond one year across an entire gamut of indicators and developments, so the classic way we look at valuations may not be appropriate today,” he explained.
Rosenberg drew parallels to the internet bubble of the mid-1990s, noting that even if the current market is in a bubble, it may not become apparent for years. The dot-com bubble began forming in the mid-1990s but didn’t burst until 2000, suggesting that timing market tops based on valuation alone can be premature.
With technology giants like Nvidia posting booming profits, the current investor enthusiasm appears grounded in actual business performance rather than pure speculation. “A bear market only ensues if and when these expectations prove to have been excessive. That day may well come, but Mr. Market has been saying for some time: ’not quite yet,’” Rosenberg noted.
Looking ahead to 2025, Rosenberg is adopting a more open-minded approach, acknowledging that the bull rally “could go further than anyone thinks.” While he’s not completely abandoning his cautious stance—noting that shifts in Federal Reserve interest rate policy could still send markets lower—he’s learning from past mistakes and keeping an open mind about AI’s transformative potential.
Key Quotes
It’s high time for me to stop pontificating on all the reasons why the U.S. stock market is crazily overvalued and all the reasons to be bearish based on all the variables I have relied on in the past
David Rosenberg, a longtime market bear and economist, made this admission in a Thursday note to clients, signaling a major shift in his market outlook driven by AI’s potential impact on productivity and economic growth.
Investors are clearly looking out beyond one year across an entire gamut of indicators and developments, so the classic way we look at valuations may not be appropriate today
Rosenberg explains why traditional valuation metrics may be failing to capture the market’s true picture, as AI’s transformative potential is causing investors to extend their time horizons beyond typical one-year forecasts.
A bear market only ensues if and when these expectations prove to have been excessive. That day may well come, but Mr. Market has been saying for some time: ’not quite yet'
Rosenberg acknowledges that while AI-driven market enthusiasm could eventually prove excessive, the strong profit performance from companies like Nvidia suggests the current rally may have fundamental support rather than being purely speculative.
Our Take
Rosenberg’s conversion is particularly significant because it represents capitulation from the bear camp at a time when AI skepticism might be expected. However, his nuanced approach—acknowledging AI’s potential while drawing parallels to the dot-com bubble—suggests sophisticated investors are grappling with how to value an unprecedented technological shift. The key insight is that AI may justify higher valuations not through immediate returns but through long-term productivity transformation. This creates a challenging environment where traditional risk management frameworks may lead investors to miss generational opportunities. The real test will be whether AI companies can deliver on productivity promises before investor patience wears thin. Rosenberg’s shift doesn’t eliminate downside risks but recognizes that fighting the AI trend based solely on historical valuation metrics may be a losing strategy in a fundamentally transformed economy.
Why This Matters
This shift from a prominent market bear represents a significant moment for the AI investment narrative. When skeptics like David Rosenberg begin reconsidering their positions, it signals that AI’s impact on the economy and markets may be more profound than even optimists initially anticipated. The acknowledgment that traditional valuation metrics may no longer apply in an AI-driven economy has major implications for how investors should approach portfolio allocation and risk assessment.
The comparison to the 1990s internet boom is particularly noteworthy, as it suggests we may be in the early stages of a multi-year transformation rather than approaching a near-term bubble burst. This could embolden more institutional investors to increase their AI exposure, potentially driving further gains in technology stocks. For businesses, this validates massive AI investments and suggests that productivity gains from AI adoption will be crucial for justifying current market valuations. The broader implication is that AI is no longer viewed as hype but as a fundamental economic shift that requires new frameworks for understanding market dynamics and corporate valuations.
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