【Big Bank View】HSBC: The AI US stock market’s estimated P/E ratio isn’t overheated, and the market is still trying to find flaws in the AI narrative

HSBC Global Investment Research stated that the current forward PE ratios for AI trades do not show any signs of overheating.

HSBC Securities published a report saying that for months, AI trades have frequently been compared to the technology bubble of the late 1990s and early 2000s. Although the rise of agentic AI has driven greater demand for data centers and chips, with bubble-related commentary widely replaced by concerns about supply bottlenecks, bearish views have continued to follow in turn.

HSBC noted that last week the market’s renewed skepticism toward the optimistic narrative on AI resurfaced. Multiple factors can explain the renewed weakness in technology stocks, from leveraged single-stock ETFs to a more hawkish stance from the Federal Reserve. Micron’s (US: MU) earnings report provided a bucket of cold water on these narratives, offering solid evidence that the AI market backdrop remains robust and healthy. But if you exclude the rally after Micron’s earnings were released, tech stocks overall did not rebound as expected.

HSBC said it is cautious about how “market narratives” drive short-term market moves, “even if fundamentals do not support changing an investment strategy.” For example, last year’s “AI bubble” narrative led to a decline of about 15% in US semiconductor stocks. However, as AI bottlenecks have become more apparent than the bubble, semiconductor-related ETFs have seen a stronger rebound.

HSBC said: “To make us more concerned, the market would have to show excessive optimism and positioning. Based on our measures, current market sentiment remains firmly neutral. A shift in market expectations toward a more dovish US interest-rate outlook could be another catalyst for stronger equities—and last week’s data has already prompted the market to take a cautious step in that direction.”

Valuation simply re-rated upward back to historical medians would be enough to keep AI trading strong

HSBC also mentioned that the current forward PE ratios for AI trades do not show any signs of overheating. For example, Nvidia (US: NVDA) is currently slightly below 20 times on a 12-month forward PE basis and is at a low point over the past decade. By contrast, Monster Beverage (US: MNST) has its equivalent metric at a 10-year high; its 12-month forward PE is close to 40 times, creating a stark contrast between the two.

Therefore, even if valuation merely undergoes a simple upward re-rating (re-rating) back to its historical median level, that alone would be enough to support AI trades continuing to develop strongly.

HSBC added that another counterargument is that market expectations for future earnings are too optimistic, and reality will eventually catch up. However, the main problem with this view is that many of the stocks’ realized earnings growth over the past year has already outpaced their stock-price performance. As a result, the trailing PE ratios of Meta (US: META), Amazon (US: AMZN), Microsoft (US: MSFT), Nvidia, Broadcom (US: AVGO), and Micron have all fallen over the past 12 months. Many other sectors in the market have not done the same.

In addition, earnings growth expectations may not yet have caught up with strong earnings momentum. HSBC said that for many companies at the forefront of the US AI wave, market expectations for full-year 2026 earnings growth are flat or even lower compared with the year-over-year growth rate seen over the 12 months ending in Q2 2025. This remains the case even though the earnings revisions ratio for these companies has improved in recent months. “Therefore, although the market’s narrative about AI continues to try to find flaws, the ‘pain trade’ may be that AI keeps strengthening in the second half of the year and delivers upside surprises beyond expectations.”