【Big Bank View】HSBC: AI U.S. stocks’ estimated P/E ratios are not overheated; the market is still struggling to find cracks in the AI narrative

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

HSBC Research published a report saying that, for several months now, AI trades have repeatedly been compared with the tech bubble of the late 1990s to the early 2000s. Although the rise of agentic AI has sparked even greater demand for data centers and chips, bubble rhetoric has largely been replaced by concerns about supply bottlenecks, but bearish commentary has continued to follow one after another.

HSBC noted that last week’s market optimism about AI resurfaced with renewed doubts. From leveraged single-stock ETFs to the Federal Reserve stance turning more hawkish, there are many reasons that could explain why technology stocks weakened again. Micron’s (US: MU) earnings report poured cold water on these narratives, providing solid evidence that the AI market backdrop remains robust and healthy. However, excluding the rally after Micron’s earnings were released, technology 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 investment strategies.” For example, last year’s “AI bubble” rhetoric led to a drop of about 15% in US semiconductor stocks. But 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 now, the market must show excessive optimism and positioning. Based on our measures, current market sentiment remains firmly neutral. A shift in expectations for US interest rates toward a more dovish stance could be another catalyst for stocks to strengthen—and last week’s data has prompted the market to take a cautious step in that direction.”

Valuation simply re-rated upward to historical median: enough to support AI trades staying strong

HSBC also mentioned that the current forward PE ratios of 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 in 10 years. By contrast, Monster Beverage (US: MNST) is at a 10-year high on the same metric, with a 12-month forward PE close to 40 times, creating a stark contrast between the two.

Therefore, even if valuation only undergoes a simple upward re-rating (re-rating) and returns to its historical median level, that alone is enough to keep AI trades developing strongly.

HSBC added that another counterargument is that market expectations for future earnings are overly optimistic, and a reality check will eventually arrive. However, the main problem with this view is that, for many of these 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 seen 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 their full-year 2026 earnings growth are flat or even lower compared with the year-over-year growth rate seen within the 12 months ending in Q2 2025. This remains the case even though those companies’ earnings revision ratio has improved in recent months. “Therefore, even though the market’s narrative about AI is still trying to find flaws, the ‘pain trade’ may well be that AI continues to strengthen in the second half of the year and delivers upside surprises beyond expectations.”