$3 trillion in revenue, 17% growth, and a dose of bubble risk

Artificial intelligence has transformed markets in ways even optimists underestimated. For investors, the challenge now is no longer spotting the trend, it's navigating the froth around it. That was Al Pullen’s message at Magellan’s latest roadshow, where he walked a fine line between genuine technological change and pockets of speculative mania.

Across markets, concentration and momentum have intensified. The Magnificent Seven, alongside other AI-linked names, have outperformed dramatically, lifting global indices to new highs. But behind the headline returns lies a more nuanced reality. 

Yes, we are living through a technological revolution with profound implications. 

Yes, high-quality tech platform companies continue to compound earnings at astonishing rates. 

And yes, we could be entering a period where AI shifts the productivity curve in a meaningful way for the first time in decades.

But exuberance has also returned. Pullen detailed examples of companies with no earnings (sometimes not even customers), soaring to multi-billion-dollar valuations simply by tethering themselves to the AI narrative. It is reminiscent of the late 1990s in parts of the market, even if the fundamentals today are materially stronger.

“I do not believe there’s sufficient evidence today to declare we’re in a broad dot-com type bubble, but I do believe there are clear pockets of elevated risk and valuation that you need to be aware of.”

For investors, this balanced framing matters. Those waiting on the sideline risk missing one of the most powerful technology waves in history. But those charging blindly into speculative corners could face brutal losses. 

As Pullen emphasised, quality, valuation discipline, and selective exposure are critical. And in Magellan’s case, that discipline has paid off; the portfolio has been underweight big tech on average, yet still delivered strong relative returns. 

Firms with scale advantages, durable moats, and real earnings will remain central, but the market will likely punish hype and over-excitement as this cycle matures.

The bubble debate: hype meets fundamentals

Pullen opened by addressing the question dominating global markets: are we in an AI-fuelled stock market bubble? He noted that since 2023, markets are up roughly 40% and bubble warnings have intensified. “Markets have been on fire the past few years and it’s been predominantly driven by a relatively small group of US tech stocks.”

The concentration is stark: the Magnificent Seven have returned ~150% versus ~25% for the rest of the market, while other perceived AI winners have surged. This has driven index concentration beyond dot-com era levels on some measures.

On valuations, the S&P 500 is trading around 22x forward earnings - 25% above historical averages. And while Pullen acknowledges the companies today are higher quality, he cautions against complacency: 

“On any traditional valuation metric, the market does not look cheap.” 

Signs of excess emerge

Pullen pointed to exuberance signals: crypto, meme stocks, narrow credit spreads, and IPO pops. He cited Fermi America’s US$19b IPO despite “no operating history, no revenue, no customers” as “totally giving pets.com vibes.”

Circular financing, a hallmark of late-stage bubbles, is also emerging, with NVIDIA (NYSE: NVDA) investing in customers who then spend on NVIDIA chips. Meanwhile, AI platform revenue remains modest relative to hype: OpenAI serves 850m users yet “only 1% of those users actually pay.” 

The bull case: scale, adoption, and real earnings

Despite risks, Pullen emphasises the transformational nature of AI adoption. From autonomous agents to robotics, he sees vast potential: 

“You do not want to sit on the sidelines for this one. The opportunities are too big, but you do want to be very careful how you get exposure given the amount of capital going into this sector."

Crucially, the largest platforms are not speculative dreams; they are profitable, cash-rich, and scaling. 

Since 2017, the group has delivered 17% annualised revenue growth, producing more than US$3 trillion in sales. 

With most trading around 30x earnings, “that is not cheap, but that is not excessive given the degree of quality and opportunity that these companies have."

Navigating the risks

Pullen warns that there are “clear pockets of elevated risk and valuation that you need to be aware of”, including AI startups, second-tier data centres and selective high-flyers such as Palantir (NYSE: PLTR) and Tesla (NYSE: TSLA). But he does not see a market-wide bubble. 

Instead, he advocates selective exposure and active management: 

“It’s a time not to run for the hills, but certainly to be cautious and have some insurance in these kinds of markets. Active management will be key."

Macro risks include slowing US growth, institutional fragility and policy uncertainty. Still, he characterises the US backdrop as “fragile, but manageable”, supported by wealth effects from housing and equities and the prospect of interest-rate cuts. 

Portfolio positioning: discipline and selectivity

Magellan remains diversified, with 27 holdings and selective additions like ASML (NASDAQ: ASML) and Thermo Fisher (NYSE: TMO) at ~17x forward earnings. Turnover is low, reflecting long-term focus and disciplined trimming and adding across valuation windows.

Performance drivers have been broad-based, not dependent on a handful of names. Notably, the fund has been underweight IT on average, yet still outperformed, reflecting bottom-up selection.

As Pullen summarised: “We invest in quality companies… we buy companies based below their intrinsic value… and we are long-term investors.” 

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