Andy Mills,

Deepak Puri, the chief investment officer of Deutsche Bank Private Bank, spoke with Quartz for the latest installment of our “Smart Investing” video series. Watch the interview above and check out the transcript below. The transcript of this conversation has been lightly edited for length and clarity. Andy Mills (AM): Does the run-up in Nvidia stock mean we’re in an AI bubble? DP: Well, that’s a great way to start the conversation. I would not call it a bubble, but it’s definitely has gained a lot of momentum over the last 15 months. I think the, AI as a secular theme is here to stay, and the impact it can have on productivity is really something that the market has taken notice of. So, there’s a lot of money sloshing around. There has been a lot of liquidity in the markets, and a lot of that is finding place in these secular themes, be it AI on the technology side, or GLP one, which is the obesity drug on the healthcare side. However, I would say that the market has started to distinguish between some of the underlying stocks that constitute the Mag 7, you mentioned Nvidia, but I think if you look at the earnings numbers from the fourth quarter, there has been site diversion. There are some names within the Mag 7 that are doing really well, but some others who are, you know, not making that much traction. So I think this year, 2024 might be the year of differentiation within the Mag 7, whereby, you know, certain names do a lot better than the rest. And I think that might be the case for active management for this year, rather than being just passively invested in an, in an ETF. AM: You’re gonna have to come up with a new name for the Mag seven. It’s gonna be what? The Fab Five, or go back to fang. DP: It could be Mag four, who knows? Yes. But yes, we love acronyms. The street loves acronyms, and I think we might need to come up with a new one. AM: Yeah, I mean, I think with traditional investing or, or the consumer being like, ah, I just do the, whatever the FANG one is, it’s like a way of branding. DP: Indeed. But I would always advocate for a much broader and better market exposure rather than one particular theme or a segment or an industry for that matter. Because, you know, a lot of these stocks are so highly correlated, Andy, that one particular driver can bring one big name and along with it comes the rest of the name. So I think you need to diversify. Read more: Let’s talk about Nvidia stock — and whether it’s in a bubble AM: If Nvidia’s up the market’s up and if Nvidia is down, the market’s down, it seems like we’re, we’re in a perilous place right now as an economy or maybe like a risk management mode. And so that might be the, the right thing to do is just differentiating where we’re buying. DP: Absolutely. And starting from a risk perspective is a better way to be invested in this market or trying to start legging in into this market if you haven’t really participated so till now, rather than just being overly exuberant about the return potential. Because whenever the markets are at such a peak, you know, we’ve 16 weeks out of the last 18 weeks, the market has gone up. We’ve just had our fourth consecutive month of markets going up. It’s not unusual for the markets to have three to four pullbacks of five-to-seven percent, a correction of 10% of, you know, in a given year. So, you know, I think you might have a better entry point into especially the tech sector later this year, rather than just capturing it at the peak. AM: We were talking about the bubble and the AI bubble. If it exists, we’don’t know… what was it that you…? DP: Yeah, I, we don’t really think there is a bubble yet. And one way of looking at it, a good measure is what’s called the PEG ratio. Okay. You know, which is PE divided by the earnings growth. You know, when you look at the PEG ratio of the tech sector, it’s actually lower than the PEG ratio of the broader S&P. So if you think the tech sector is in a bubble, then you would have to assume that the entire S&P is in a bubble and, at 21 times earnings, I don’t think so. Maybe it’s a bit more expensive than what we’ve seen over the last four or five years. But the PE multiple for the S&P has, you know, sort of graduated to a higher average than it used to be. Back in the day 15 times earning was like the defacto standard to, to make a call, whether it’s cheap or expensive. I think that has moved upwards as the components of the S&P have shifted towards more digitization, more tech-oriented names. So I think now 18, 19 times is considered sort of the average and we are trading at 21 times. It’s not that bad. The other thing I would say, when you look at this particular rally, let’s say, compared to the late 1990s, one thing that’s different this time around seems to be the earnings backdrop. These price momentum or price increases are not happening just because of PE expansion. There’s a very strong earnings momentum behind it. So I think that is a very different take compared to where we were in the dot-com bubble era. AM: Thank you so much, Deepak. DP: Pleasure. Thank you for having me.