Thus, to achieve the Lollapalooza effect, not only must several forces move in the same direction, but they must also reinforce each other to reach a critical mass, leading to a cascade of effects.
It is from this perspective that I view the enthusiasm surrounding AI in equity markets over the past several months. In my opinion, multiple factors, both economic and psychological, are working in the same direction to create the Lollapalooza effect that is driving many AI-related stocks. I will not use the term “bubble,” as it is overused, but rather an extraordinary surge of enthusiasm.
Conversely, the Lollapalooza effect can also work in the opposite direction, dragging many stocks into a downward vortex. I recently read that while the S&P 500 is reaching new highs, an unusually high number of stocks in the index remain close to their 52‑week lows. This is the flip side of the enthusiasm for AI: markets are neglecting the stocks of companies whose business models could be disrupted by AI — let us call them “non‑AI” stocks.
In my view, many factors or psychological biases contribute to the Lollapalooza effect observed in AI and in “non‑AI” stocks. I will limit myself to the most obvious:
The availability bias. This is a cognitive bias whereby we assess the probability or importance of an event based on how easily examples come to mind, rather than on statistics or complete data. I believe that the public launch of ChatGPT in November 2022 was a turning point for AI. From that moment on, AI and its impressive capabilities became accessible to everyone and widely discussed. At the same time, AI’s possibilities began to threaten the business models of many established companies.
The social proof bias. It is extremely difficult not to follow mass movements, especially when they have led to strong stock market performance over recent years. North American equity indices, driven by major technology companies and AI, have become “no‑brainer” investment decisions. In parallel, investing in “non‑AI” stocks has been painful in recent months — many investors avoid them like the plague.
I would add another powerful trend in the financial industry: the institutional imperative. The pressure on portfolio managers to conform and participate in mass movements is very hard to resist.
The confirmation bias. Some may have been skeptical about AI prospects, but stock market performance combined with massive investments by major technology companies (the hyperscalers) strongly supports the appeal of AI investments. One can read everywhere testimonials confirming the power of AI for the economy and businesses. At the same time, the decline in many “non‑AI” stocks seems to confirm this view.
The Straight-Line Instinct. We all tend to extrapolate recent performance and results of stock markets and companies. For many, the strong rise in AI-related stocks and the exceptional performance of the S\&P 500 over the past several months can only continue.
As Gautam Baid wrote in his book, The Joys of Compounding, regarding investment psychology: “The performance you will achieve over your investing career will largely be determined by your behavior during the rare periods of extreme market excess.”
I believe we are going through one of those rare periods of extreme excess. In such conditions, the ability to go against the crowd and not follow herd behavior (when one believes it is not rational) remains the best way to invest successfully over the long term. This does not mean it is easy, as many psychological biases work against all of us.
Philippe Le Blanc, CFA, MBA
Chief Investment Officer at COTE 100
_______
This article is also published on 
(in French)
