Why investment giant Mercer believes the AI boom could end badly for stocks

Global investment powerhouse Mercer has sounded the alarm over tech stock valuations, despite it managing $27 trillion in assets and believing in AI’s revolutionary potential.

Elon Musk speaks with Nvidia chief Jensen Huang as they attend the Saudi Investment Forum at the Kennedy Centre on Wednesday. Picture: AP

Investment giant Mercer is cautious about stocks and the artificial intelligence boom which it says could end badly, even as it transforms the global economy.

Its warning comes as Australian stocks have had their best day in five weeks – the ASX 200 index climbing 1.2 per cent to a two-day high of 8552.7 points as US futures soared on better-than-expected results from the world’s biggest company and AI poster child, Nvidia.

But Mercer strategist Brendan Hallett is wary of piling in right now, particularly in US tech, even as he sees AI as a watershed moment similar to the advent of electricity or the internet.

“It’s actually very hard for us to get more confident about equities at the moment,” Hallett tells The Australian.

“Whilst we believe in artificial intelligence, US tech valuations are quite high and that is what is causing us to maintain a neutral valuation in equities.”

Mercer is an investment powerhouse that has about $US17.5 trillion ($27 trillion) of assets under advisement. It manages about $680bn of funds globally and about $70bn in Australian super funds.

The investment manager’s outlook pegs an AI bubble as the biggest risk for 2026, and finds that rapid growth in any technology carries the potential for capital misallocation.

“We’re building out huge amounts of AI infrastructure. These companies are trading at very high valuations,” Hallett says.

“It doesn’t mean that these companies are not great. It just means that potentially there’s a bit of mispricing in the market at the moment.”

He points to Cisco, which rose 1311 per cent to $US82 a share in the decade leading up to the tech wreck. The networking equipment maker was a superb company which helped build the internet. But while rising 879 per cent since the tech wreck, its shares have not quite regained their bubble-era peak.

Mercer strategist Brendan Hallett says his company is ‘wary’ of equities at present

The hyperscalers – or big tech companies building AI infrastructure – are expected to spend close to $US500bn in 2026 and 2027. But the pay-off from much of that investment is years away.

The concerns are shared by a growing number of investors.

Bank of America’s global fund manager survey this week shows a sharp rise in fears of an AI bubble.

The survey found 45 per cent felt it was the biggest tail risk for the economy and markets, up from 33 per cent last month. Just over half of respondents said AI stocks were already in a bubble. A record 63 per cent thought global equity markets were overvalued, which was up from 60 per cent last month.

For the first time since August 2005, a majority said companies are overinvesting in the AI boom. But there are signs the AI investment may be bearing fruit.

Some 53 per cent of investors thought AI is already increasing productivity, a figure which is a three-month high. Another 15 per cent expected the productivity boost to arrive in 2026, while 27 per cent said it will take longer.

And despite worries about spending, new concerns about excess capital spending by AI hyperscalers aren’t translating into broad balance-sheet concerns for the corporate sector.

The cautious stance marks a shift from earlier in the year. Mercer moved from underweight to neutral on equities in July as trade deals were struck and tariff concerns eased.

“We went underweight equities but we reduced that in July when trade deals started to get done and we didn’t see much pass through by corporates at that stage,” Hallett says.

For Australian investors, Mercer foresees stronger economic growth in 2026, driven by recent Reserve Bank interest rate cuts, solid consumer confidence and decent income growth.

However, low productivity growth continues to be a problem.

It’s no longer a consensus view but Mercer expects the RBA to keep cutting rates in 2026 as it expects inflation to remain consistent with the target band.

Rather than chase expensive US tech stocks, Mercer is hunting for value elsewhere. The firm is overweight Japanese equities, backing that country’s exit from decades of deflation.

“Japan’s going through a bit of revival. They’re exiting this multi-decade period of deflation. Rising wages should lead through to higher consumption and improving economic growth,” Hallett says.

The outlook also highlights growing debt sustainability risks.

The Congressional Budget Office estimates US debt will hit 120 per cent of GDP by 2035.

But Hallett says this was an extremely long-term concern. “If you had said to me 10 years ago ‘are we worried about debt sustainability in the US?’ I would have said yes. If you asked me today, I’d say yes. And I just have a feeling that if you ask me about it in 10 years, we would say yes again.”

On inflation, Mercer expects a near-term spike in the US due to tariffs, but this should fade by late 2026 or early 2027. The key will be wage growth, which isn’t expected to climb significantly.

Investors now await Thursday’s release of September’s US non-farm payrolls report, which has been delayed by the recent government shutdown. The report won’t contain an unemployment rate.

The market-implied chance of a December US rate cut by the Federal Reserve fell from 46 per cent to 28 per cent after officials said November’s report won’t be released until December 16 – too late for the Fed’s December 9-10 meeting.

For now, Mercer is sticking to its cautious approach, balancing optimism about AI’s potential against the risk that lofty expectations won’t be met.

Originally published as Why investment giant Mercer believes the AI boom could end badly for stocks