Everyone says that we are in a bubble and that tech is overvalued because of AI, but I think people are ignoring the fact that most of the revenue and profits for those companies do not actually come from AI. Even if we never reach AGI, the MAG 7 will keep growing because of their other products and services, and AI will just make their existing operations more efficient.

Back in the dot com bubble, unprofitable startups were going public and shooting up overnight. That is not what is happening now. Most of the risky AI startups are still private, even the big ones like OpenAI. The companies driving the market today are already extremely profitable and diversified.

If you look at the equal weighted S&P 500, valuations are only slightly above average, with a P/E of about 22 compared to a 10-year average of 19. For the regular S&P 500, it is around 27 compared to 20. So it is really the mega cap tech names that are expensive, not the entire market.

If AI hype slows down, I think we will just see a sector rotation, not a crash. Money will move into other parts of the economy that are still reasonably valued. And with interest rates starting to go down again, I doubt we will see a major selloff. Unless the MAG 7 are somehow faking their revenues, the worst case seems like a mild recession, not a market collapse.

It seems like pretty much any time since the great recession ended and we were close to all time highs, all the media pundits claim that we are over valued. This obviously can't be the case at this point because it's been claimed for so long. Maybe the issue is we need to change the formula for valuing stocks?