Bernstein sounds the alarm: excessive liquidity is fueling a "comprehensive bubble", and AI is just the tip of the iceberg.

Richard Bernstein Advisors (RBA) issued a warning that excess liquidity is pushing asset prices well beyond levels supported by fundamentals, with the current market bubble spreading beyond artificial intelligence (AI) to create a "comprehensive frenzy." The company's Deputy Chief Investment Officer Mike Contopoulos recently stated, "We are currently in some sort of 'mega bubble.' This is not just AI - cryptocurrencies, meme stocks, special purpose acquisition companies (SPACs), investment-grade bonds, high-yield bonds, none are spared." The seasoned professional, with 25 years of market experience and former head of high-yield strategy at Bank of America, pointed the finger at loose monetary and fiscal policies as the cause of this valuation frenzy detached from fundamentals. Contopoulos specifically highlighted concerns among credit investors regarding the AI boom. If AI thrives, bond holders will not be able to share in its excess returns; if it fails, investors will bear the losses. Currently, the market is increasingly focused on tech giants committing billions of dollars to AI infrastructure investment - most of which will be raised through the U.S. debt market. Data shows that Microsoft, Alphabet, Amazon, and Meta are expected to increase their capital expenditures by 34% to around $440 billion in the next year. "The tech sector will see a decline this year," Contopoulos questioned, "What do investors see in tech bonds that they are willing to provide financing for a technology that may become obsolete in five to ten years for a period of 40 years?" RBA, which uses exchange-traded funds (ETFs) for cross-asset class investments, has completely exited the corporate bond market. A year ago, they were overweight in this sector. "When spreads fall below 90 basis points, the relative value proposition no longer holds for us," Contopoulos explained. As of Wednesday, the U.S. high-grade credit risk premium rose to 78 basis points and has been below 90 basis points since May last year. Contopoulos warned that if the Fed's pace or extent of rate cuts falls short of market expectations, credit spreads could further widen this year. Additionally, unexpected slowing of economic growth poses another major risk. With corporate bond spreads at thin levels, RBA instead sees investment value in collateralized loan obligations (CLOs), mortgage-backed securities (MBS), high-grade floating rate debt, and European stocks. "There is nothing more attractive than high-quality European stocks," Contopoulos said, "there is fiscal stimulus policies, monetary policy is quite supportive, and profit growth is accelerating there."