AI stock rally may be driven by fear of missing out, but strategists say hold tight

AI-related equity valuations maybedriven by fear of missing out, known as FOMO — but now’s not the time to get cold feet, according to strategists.

Global equities are at persistent highs, the European Central Bank said in its Financial StabilityReviewon Wednesday. At the same time, concentrationamong a small group of interconnected U.S.hyperscalers has also intensified, makingthe market vulnerable to sharp adjustments, it warned.

Hyperscalers typically refer to AI-related technology namessuch as Nvidia, Alphabet, Microsoft and Meta.

“Current market pricing does not appear to reflect persistently elevated vulnerabilities and uncertainties,” the review said.

Investors may be driven by”optimism that tail risks will not materialise,”butmovescouldalso “reflect fears ofmissing out ona continued rally, as markets have proved to be resilient to recentshocks,” itadded.

Strategists noted some FOMO in the market but believe there is still real value in some AI plays.

The ECB’s review is designed to highlight potential risks to financial stability, Julien Lafargue, chief market strategist at Barclays Private Bank and Wealth Management pointed out, “even if the probability of those risks materialising is low.”

Valuations are “not cheap” but companies are delivering on growth, he told CNBC, calling for differentiation across specific sectors. The bigger risk lies with companies benefitting from an increased share price when they have not yet generated earnings, Lafargue said, pointing to quantum computing-related companies.

“In these cases, investor positioning seems driven more by optimism than by tangible results,” he said.

“In short, while some valuations may be driven by ‘FOMO’ others are backed by extraordinary earnings growth and, as such, differentiation is key,” he added.

The ECB’s review follows a rollercoasterfewweeksfor global stocks amid Nvidia earnings, which buoyed an otherwise deflating equities market that had been pressured by circular dealmaking, debt issuances and high valuations. The earnings initially sent the tech giant’s stock soaringbut then quickly reversed.

The market is spilt on whether there is an AI-fueled investment bubble, with one investor going so far to say thatthere is an ‘everything bubble.’ Bridgewater Associates founderRay Dalio expressed concern, Blackrock’s Larry Fink pushed back on the need for large checks to be cut for AI infrastructure, and ArkInvest’sCathie Woodrejected the idea of a bubble.

In contrast, the ECB is the latest in a string of central backs tourge caution, with earlier warnings coming fromthe Bank of EnglandandInternational Monetary Fund.

The European central bank did not weigh in on whether it thinks a bubble hasemergedbut notedparallelswith thedot-com boom and bust.”But the current high valuationsappear to be underpinned by exceptionally robust earnings performance,”it added.

Still, “market sentiment could shift abruptly, not only if growth prospects deteriorate but also if technology sector earnings – especially those of companies associated with artificial intelligence –fail todeliver on expectations,” Luis de Guindos,the ECB’s vice president, wrote in the report.

He noted that non-bank financial intermediaries in the euro area would likely face losses in such a scenario because of their concentrated exposure to the U.S. “Liquidity mismatches of open-ended investment funds, pockets of high leverage among hedge funds and opacity in private markets could amplify market stress,” De Guindos added.

The ‘Magnificent 7’ stocks — Alphabet, Amazon, Apple, Tesla, Meta, Microsoft, and Nvidia — are currently up 24% year-to-date. Crypto has been volatile, experiencing a major sell offthis month that hit Bitcoin and Ethereum in particular.

“Ultimately, the ECB has a point,” said Michael Field, chief equity strategist at Morningstar. The Magnificent 7 stocks account for 40% of the Morningstar US index, which is a risky level of concentration, the strategist said, adding “the fact that all seven stocks have large exposure to the AI theme brings on another level of risk.”

Still, the firm sees an upside in most of those big names. Tesla, however, is “more than 50% overvalued,” Field said.

“It’s hard to deny that the valuations of other stocks exposed to the AI theme aren’t stretched, as per the ECB’s comment. U.K. darling ARM Holdings trades at almost 90 times our estimate for 2026 earnings, double the multiple of Nvidia. This is certainly a risk,” he added.

“So, should we start panicking now and selling the market? No is the answer. But it’s important to be aware of the inherent risk and not be swept in theFOMOas share prices continue to climb,” Field said.

ForWedbush’s Dan Ives, markets are not in a bubble; this is year three of an eight-to-10-yearbuildout for an AI Revolution, he told CNBC.He sees two additional years left in “this tech bull market” before a slow down — not a burst.

“It’s10:30 p.m. in the AI party and it goes until 4 am, and the ECB will be watching through the windows from the outside,” Ives said.

“Europe is in a time capsule around tech innovation along with crypto andit’sbeen a frustrating time for many tech investors and entrepreneurs in the region we have spoken to through our globaltravels,” headded.