Why BlackRock’s Rick Rieder isn’t too worried about AI stock bubble

Rick Rieder manages approximately $2.4 trillion in assets Black Rock. He has been the world’s top money manager for nearly two decades and has seen a lot happen in the market. But he says there is no such thing.

“I think we’re in extraordinary times. I don’t think we’ve ever seen anything like this before,” he told CNBC’s Scott Wapner at the CNBC CEO Council Summit in Washington, D.C. on Tuesday.

Faced with choosing between “too much uncertainty” and a market that continues to rise, Rieder concludes, “I think you should, you should stay in it.”

This view is not new to Rieder. He told Wapner in August last year that this was the best investment environment he had ever seen. But nothing has changed his view, even as mega-cap tech stocks spend increasingly more on artificial intelligence and concerns grow about a dotcom bubble-like environment. His perspective on the stock market does not have to be that he will make huge profits from it. He said a market that is performing “extremely well” will “probably continue to perform well.”

But Rieder says the trends are both structural and technical to believe the bull market has more room to move. First of all, cash keeps coming. “There is a tremendous amount of cash,” he said. “Even though the IPO calendar is big. There’s still a huge amount of buybacks, so I think the ‘techniques’ are good,” he said.

Part of the bullish story from cash is that central bank interest rates in developed markets remain high and perhaps even move “a little bit higher,” he said.

Rieder added that income streams created from high-yield portfolios (6% to 7% without much risk in the current market) benefit from the compounding effect, which also allows investors to “buy some volatility” in the outcome.

It’s now clear whether the long-term risk in stocks is still worth it compared to the return opportunity in bonds. a more pressing question among investors. But Rieder, chief investment officer of global fixed income at BlackRock and also head of the global allocation investment team, says cash is being sought to be reallocated to stocks because of trading multiples and earnings growth forecasts that, in his view, are more reasonable than investors might assume.

“First of all, put semis and technology aside and look at what the stock market is doing. It’s not very spectacular,” he said. “Six percent.”

“Are there days when I look at some of these stocks and say, ‘okay, this is a bit much,'” Rieder said. he said.

The answer is yes, and such days have become more frequent lately, with individual stocks like Snowflake, Micron Technology, Dell and Hewlett Packard Enterprise gaining over 20% and even 30%.

“Then I look back at the group… you can embrace this,” he said.

Rieder noted that price-to-earnings ratios in technology stocks and semiconductor stocks are lower today than they were last October. However, the projected earnings growth for one year ahead is even greater. “You’re talking about 20%+ earnings growth, that’s incredible,” he said.

Especially technology companies called “Mag 7” current P/E ratio is 26And earnings growth this is expected to be over 30% in some cases (current hash rate for Mag 7 as a whole is 27.6% growth).

The S&P 500’s forward P/E ratio is currently 21, also down from last fall as the index’s one-year earnings growth forecast increased, currently just north of 20%.

Buying from existing floors “is actually not that scary,” Rieder said.

He said it might be easier for some stocks to rely on a demand function that he described as “pretty strong” over the next 2-3 years, rather than believing that earnings growth will be perfectly reflected in Wall Street’s forecasts. But Mag 7 said of the stocks that “the earnings power they generate… the earnings potential going forward is quite strong.”

Rieder currently serves on Alphabet’s Investment Advisory Committee.

There are good reasons to be cautious, as Rieder said he did with some stocks. Rieder is “concerned about crowding, not just in the overall markets, but also in single-name stocks, where you’re seeing more crowding, more momentum trading than I’ve ever seen before,” Rieder said.

One way to deal with rapid price movement in stocks is to take some risk off the table by hedging the stocks—Rieder underwrites many stocks in his portfolio through the options market, especially stocks that have risen too much. As the latest example, he gave Micron Technology, which has increased by over 200 percent this year. “After things developed the way they did, I sold call options at 95 ‘vol’, which is quite unusual. Not only is the buying happening… people are willing to pay for the continued acceleration of this, which is remarkable,” he said.

He stated that the level of financing realized in the market should also be cautious. “Let me tell you, how much, most of the weekend I spent, spent on new issues coming in…debt markets, equity markets, convertibles, different types of loans. There’s so much financing happening and it gives you pause a little bit, everything is moving as fast as it is today…You still have to find room for some of that.”

The ongoing debate over the return on investment capital ultimately generated from all that investment spending, especially with big tech stocks and the broader stock flow linked to AI optimism (Alphabet’s $80 billion equity issuance being the latest example of how spending figures continue to rise) is a risk factor that Rieder said BlackRock has spent “a lot of time” studying.

But he added: “The difference between now and the internet bubble is as different as it gets.”

“Smart companies” raising capital today not only need it for capital expenditures, they do so with actual cash flow that they can use to fund future growth. So compared to the dotcom bubble, “I feel a little more comfortable about it,” Rieder said.

The dynamic infrastructure spending environment could ultimately force a reckoning on the stock market and will remain a big unanswered question. However, Rieder is of the opinion that a decision will not be made soon enough to change his stance on having more room for movement in the market in the short term. Because of strong forward demand and “quite large” backlogs, “in my opinion we won’t know the answer for a year or two,” he said.