AI Euphoria: Why Security Matters Again

• Signs of an AI bubble are mounting
• A high share price is no proof of high value
• Maintaining the ability to act is becoming the decisive factor for security

Such signals typically become more prevalent towards the end of a cycle. This does not necessarily mean that companies suddenly become unprofitable. A market can, however, simply become too top-heavy. If stock market capitalisation continues to outpace the real economy over an extended period, valuations eventually become unsustainable. What then breaks is not necessarily the economy, but the valuation. Share prices can fall significantly even if the underlying companies remain profitable.

Demand Is Broadening

The high levels of investment associated with AI are increasingly making themselves felt in the real economy as well. Demand for computing capacity and digital infrastructure is growing, meaning that the AI capex boom is benefiting far more than technology companies alone.

Geopolitics is another factor. Europe is rearming, and defence budgets are increasing structurally and over a period of years. Yet security encompasses far more than weapons and ammunition: it has also become digital and infrastructural.

What matters is the quality of this growing demand. Orders are becoming tangible: factories, ammunition production lines, satellites, data centres and power grids. These are real order books, not fanciful promises. And demand is broadening: it is no longer dependent on a handful of companies, but is also benefiting suppliers, energy, industrial companies and materials producers.

When Wealth Is Converted into Cash

Current developments surrounding major technology and AI companies highlight another important distinction: wealth and cash are not the same thing. The high valuations of recent years have created enormous wealth, and this wealth is increasingly being converted into cash. Even experienced investors are quietly exchanging part of their wealth for cash.

This is no coincidence. Particularly during euphoric market phases, the question of how much accumulated wealth is actually readily available becomes increasingly important. A high share price is no proof of high value. And a popular stock is not automatically a safe investment.

What Could Curb the Euphoria

No one knows whether or when a more substantial correction will occur. Timing is more a matter of speculation than of investment craftsmanship. Those who invest against the market at its peak risk suffering a prolonged loss of capital. One possible trigger could be a further rise in long-term interest rates. At least money-market rates for US dollar and euro investors have normalised again. This means that cash held in reserve can once again generate ongoing interest income. In the long term, nominal investments do not offer genuine security in an overindebted world; in the short term, however, a liquidity reserve can reduce exposure to price risk.

At the same time, companies with stable cash flows, strong market positions and reliable dividend policies are becoming increasingly important. The Swiss equity market in particular offers numerous such companies whose business performance is only moderately dependent on the current AI boom.

Security Means Retaining the Ability to Act

For investors today, security means more than simply avoiding risk. It is about being able to seize opportunities without losing sight of capital preservation.

Following the strong gains in highly valued US technology and AI stocks, we believe it makes sense to realise some profits and reduce existing concentration risks. At the same time, we consider it prudent to maintain a larger share of the portfolio in liquid assets as dry powder, while placing greater emphasis in equity allocations on companies with stable cash flows, strong market positions and reliable dividend policies. High-quality Swiss dividend stocks may also form part of this approach. Gold likewise retains its role in the portfolio as an additional source of diversification.

In our view, the decisive factor is not predicting the next turning point. Rather, it is about structuring wealth in such a way that sufficient liquidity and room for manoeuvre remain available even during periods of heightened market volatility. Taking an integrated view of all assets helps investors assess risks and opportunities in the context of their overall wealth.