When it comes to the massive sums that

Big Tech

companies are spending on

artificial intelligence

infrastructure and the influence that is having on stock markets, Philip Petursson is of two minds.

On the one hand, the chief investment strategist at IG Wealth Management Inc. is not quite ready to declare it a

bubble

— at least not the kind on the verge of spectacular collapse. On the other, he thinks it would be “irresponsible” to rule out the possibility.

“The question is: How big is that bubble today, and how much more potential is there before the risk of it bursting, if at all, emerges?” Petursson said.

Petursson has staked out some middle ground in a debate that has been hanging over

equity markets

for much of the past year. Despite

trade war

uncertainty, U.S. stocks enjoyed their third straight winning year, with the

S&P 500

up about 17 per cent and the tech-heavy

Nasdaq

up about 22 per cent, driving their three-year returns to approximately 79 per cent and 123 per cent, respectively. The persistence of those gains, the lofty valuations they’ve created and the concentration of gains in the tech space have sparked disagreement about whether investors are staring down a frothy market or the dawn of a sustainable artificial intelligence era that could drive stocks even higher. It’s a combination that is making 2026 a particularly difficult year to plan for.

“We are seeing those massive hockey-stick parabolic curves,” said Nicholas Mersch, a portfolio manager at Purpose Investments. “(

ChatGPT

creator)

OpenAI

essentially didn’t have a product three years ago, and now they’re on a US$20 billion revenue run rate, so this is really the step function growth that we haven’t seen in a very, very long time.”

Mersch said that despite the growth, there are valid concerns for investors about the rise of AI and how it is being funded. Morgan Stanley strategists have said they expect tech companies to take on as much as US$1.5 trillion in debt by 2028 to finance the infrastructure such as data centres they will need.

“There’s more debt in the ecosystem now,” Mersch said. “The net issuance of debt, on a year-to-date basis, has been the highest out of any most recent history that we’ve seen.”

Circular financing is another concern, where one company, for instance

Nvidia Corp.

, makes an investment in OpenAI and OpenAI then buys Nvidia’s products, potentially creating artificial demand, inflating valuations.

David Rosenberg

, founder and president of Rosenberg Research & Associates Inc. is one of those who believes the S&P 500 is in a classic price bubble, one tied to investor behaviour and the reaction to the shift in the technology curve.

“Everybody is in the same trade at the same time and the sentiment is as wild as the valuations are,” Rosenberg said. “Nobody took chips off the table this cycle and

diversification

became a dirty 15-letter word.”

He said that historically bubbles last about 16 months and he thinks this one started in June 2024.

“I think time is running out,” he said. “We’re not in the 10th inning anymore, we’re in the 13th or 14th.”

In December, the Shiller P/E (price-to-earnings) ratio of the S&P 500, a metric often used to measure stock market valuation, topped 40, a level it hasn’t reached since the last tech bubble of the late 1990s.

The trailing P/E ratio, which looks at earnings from the past 12 months, is also elevated, at about 27.

But Petursson is quick to point out that the Shiller P/E normalizes the past 10 years of earnings and adjusts it for inflation to today’s price.

“The Shiller P/E skews things in a way that makes them look more expensive than they actually are,” he said, noting that COVID-19 and the subsequent inflation and period of lower earnings that followed was not a normal environment.

Valuations of major AI-involved companies such as Nvidia Corp.,

Alphabet Inc.

,

Amazon.com Inc.

, and

Microsoft Corp.

, are also still well below the “highflyers” of the dot-com era, Petursson said.

In March of 2000, Qualcomm was trading at 300 times earnings, Yahoo was at 266, Motorola was at 168 times and

Cisco Systems Inc.

was at 165. Even Microsoft was trading at 55 times its earnings, Petursson said. In comparison, looking at

Magnificent Seven

megacap tech stocks today, Nvidia is trading at 45,

Apple Inc.

at 37, Alphabet at 36 and Microsoft at 34 times earnings.

“The other key difference is that (today’s Big Tech) companies are generating billions in revenue and earnings, and so it’s not that they’re raising money out in the marketplace to spend frivolously on a back-of-the-napkin idea,” Petursson said. “It’s apples to oranges.”

He said earnings even across non-tech sectors have been positive. “We are in an economic upcycle, and companies are benefiting as a result of it, whether they’re a technology company or consumer discretionary company.”

Carol Schleif, chief market strategist at Bank of Montreal (BMO) Private Wealth, also does not think the current situation is a bubble. She said another sign to look at is how discerning investors are.

“When a bubble is bursting or about to burst … either everybody buys everything and pushes (the market) up, or everybody sells everything and pushes it down,” she said. “You don’t get any discernment.”

Right now, there is divergence, she said. For instance, when five of the Magnificent Seven companies released their earnings last quarter, some of their stocks went down while others went up.

It’s also important to track how high-risk the stocks in question are. And this concerns financial experts on both sides of the border.

While Mersch said it is difficult to say whether the market is in bubble territory, some of the more speculative names in the AI space, such as so-called “neoclouds” like CoreWeave Inc., which offer AI-optimized, GPU-backed servers, could be. “Some valuations look relatively sane, but there are pockets that are definitely frothy,” he said.

Nikola Gradojevic, professor and Fidelity Chair in Finance at the University of Guelph, said he has concerns about the proliferation of AI startups within Canada as well.

“It is partially a bubble,” Gradojevic said, adding that it is unclear how many of these startups will ultimately be successful. “There’s too much hype and not much delivered in terms of profitability and innovation.”

Still, he foresees a correction occurring at some point. “All these companies cannot attract capital forever if they’re not producing anything,” he said.

Given investor psychology, a market bubble, no matter what sector it is concentrated around, has the potential to affect all investors if it bursts.

“Often we’re making financial decisions based on gut feelings or emotions or even social forces,” said Lisa Kramer, a professor of finance at the University of Toronto. “You can also have people behaving impulsively when markets start moving quickly.”

For example, Kramer said, during the 2007 U.S. housing market bubble, which triggered the 2008 stock market crash, many retirees liquidated their holdings after a third or more of their portfolios vanished overnight.

“When things rebounded, they tried to get back in, but of course, they were buying back in at higher prices,” she said. “It’s hard to overcome those kinds of emotions.”

Former International Monetary Fund first deputy managing director Gita Gopinath warned in October that an equity market correction of the same magnitude as the dot-com bubble could erase US$20 trillion in wealth for U.S. households.

But the fallout might not be so bad for Canadian investors whose portfolios are more skewed toward domestic investments and less exposed to the tech sector, wrote Royce Mendes, managing director and head of macro strategy at Desjardins Group, in a commentary that same month.

“This lower exposure to tech and equities means Canadian households haven’t fully participated in the recent bull market — but it also means they’re less vulnerable to a correction,” Mendes wrote.

While most experts say it is impossible to time a stock market crash, there are strategies investors can consider to mitigate potential losses in a downturn.

Rosenberg said investors need to diversify their portfolios and dial down their degree of risk.

“I’d be raising cash, and I’d be moving into the more defensive areas of the stock market, whether that’s utilities, the pipelines, consumer staples or health care,” he said. “(They) still might go down in a bear market, but you won’t get crushed.”

Rosenberg also suggested investing outside of the U.S., especially in Asia, which he said is the least connected to the American stock market. He recommended the U.K. Financial Times Stock Exchange (FTSE) 100 index as well.

“Right now, the two markets that look the best to me globally are Treasuries and U.K. gilts — because those are two central banks that will still be cutting

interest rates

— and precious metals.

While Petursson said volatility can spread widely in the immediate aftermath a bubble, diversification should pay off in the longer term.

The TSX could be a good hedge against a hypothetical AI bubble, Petursson said, given that Canadian stocks are less exposed to AI compared with the U.S. He said IG Wealth has a base-case expectation of return for the S&P/TSX composite of approximately nine per cent (a target of 34,500), while their base case for the S&P 500 index is about five per cent (a 7,200 target).

The Materials (gold) and energy sectors have shown lower correlations historically to tech, he said, while Canadian banks are another attractive investment as they’re less sensitive to AI.

Schleif said BMO is predicting fixed-income markets will remain steady, especially since it appears most central banks have finished lowering interest rates, so fixed income investments such as bonds could provide some stability in investor portfolios in the case of any turbulence.

If you can’t see yourself parting with your current portfolio, Rosenberg said you can consider selling call options against your holdings to provide yourself with some insurance.

“The one thing that I found in the past, when the bubble bursts, you want to be long-value, short-growth,” he said. These “pair trades” could include taking a long position with the Dow Jones Industrial Average and short with the tech-heavy Nasdaq Composite, for example.

Younger investors have time on their side and do not need to de-risk their portfolios as much, Rosenberg said, as long as they can stomach the volatility.

Petursson said a longer time horizon doesn’t mean younger investors should go all in on equities without any capital to buy into a potential market dip. He suggested a more balanced distribution, such as 70 per cent in equities and 30 per cent in fixed income.

Rosenberg has more concerns about baby boomer investors, who could be disproportionately impacted by a market bubble now compared with the previous dot-com crash.

“In 2000, the median age (of the baby boomers) was 45 not 70, so time was on their side to make up for the losses,” he said. “Time is not on their side this time around.”

Overall, Petursson said he feels positively about next year’s investment outlook, due to strong earnings growth.

“Both Canadian and U.S. economies have surprised to the upside, meaning they’ve done better than expected, and this has led to a better expectation for 2026 than what we may have had, say, six or nine months ago,” he said.

Trying to invest around the notion of a bubble is another form of timing the market, Petursson warned.

“More money has been lost trying to predict the top of the market than at any other time,” he said. “The best approach is to just continue to invest periodically … because the corrections are unpredictable.”

He thinks people are overly concerned about bubbles, suggesting the “red zone” of AI spend could still be years away. He predicted AI bubble concerns are more likely to materialize in the back half of 2026 or early 2027, if they do.

Kramer, too, warned against the risk of becoming uninvested.

“Then you’re certain not to get the upside,” she said. “

Inflation

has popped up in recent years, and if you’re just sitting on cash in an era when there’s inflation, then your spending power is being eroded.”

Regardless, practicing “portfolio hygiene,” or paying attention to what you own, is important, Schleif said.

“The last thing you want to do is be sitting in the front seat of the rollercoaster, hanging on for dear life.”

  • 2026 will not be the time to swing for the fences as investors
  • The Federal Reserve’s rate cut was a clear signal to investors

• Email: slouis@postmedia.com