Wall Street’s beloved stocks tied to artificial intelligence aren’t quite the deals some investors might imagine.
Several elements influenced the recent highs reached by the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite in late 2024 and early 2025. However, the meteoric rise of artificial intelligence has undoubtedly played the most significant role in captivating the investment crowd.
By equipping software and systems with the ability to think and operate independently of human intervention, AI promises a virtually endless potential for growth. This advancement allows AI-driven applications to adapt and tackle new tasks autonomously, without needing human direction.
Researchers at PwC, in their "Sizing the Prize" report, predict that AI could expand into a global market worth a staggering $15.7 trillion by 2030. Should this forecast come close to realization, it would signify substantial benefits for businesses involved in AI hardware and its practical applications.
Among the frontrunners of the AI wave, Nvidia, a giant in graphics processing units, and Palantir Technologies, known for its data-mining prowess, have emerged prominently. Nvidia once gained over $3 trillion in market value, climbing to be Wall Street’s most valued public company. Meanwhile, Palantir saw its shares skyrocket in mid-February, marking an impressive near-2,000% two-year gain.
Yet, fortunes can change swiftly.
By the close of trading on April 4, Nvidia and Palantir saw their shares drop 37% and 41%, respectively, from their all-time peaks. Many might see this sharp downturn as a buying window, but three significant challenges suggest caution is warranted before investing in either company.
Next-Big-Thing Bubbles: A Repeated Phenomenon
In the upcoming decade, AI is poised to transform sectors and significantly enhance the efficiency and profit margins of notable public firms. However, in the short term, the historical pattern does not favor AI titans like Nvidia and Palantir.
Since the internet boom in the mid-90s, each new technological leap has experienced an initial bubble and subsequent burst. Time after time, investors overestimate the speed and utility of emerging trends early on, leading to a disconnect between expectation and reality, which inevitably bursts the bubble.
The reality that most businesses are far from fully utilizing AI solutions or seeing returns on their AI investments indicates that investors have, once again, overplayed the early stages of AI’s capabilities and adoption.
For Nvidia and Palantir, there is a positive note due to their strong backlogs. Palantir, for example, typically inks long-term contracts with the U.S. government for its Gotham platform. Meanwhile, a high demand for Nvidia’s GPUs means substantial orders are in the queue. Even if the AI bubble bursts, sales won’t instantly plummet for these companies.
Still, companies leading new trends often suffer the most when bubbles pop. If the past is any guide, Nvidia and Palantir stock could see further declines.
The Impact of Tariffs on Operations
Investors might be weary of discussions surrounding President Trump’s tariff strategies, yet it’s a crucial factor dissuading potential investment in Nvidia and Palantir Technologies.
On April 2, dubbed "Liberation Day" by Trump, he unveiled a comprehensive 10% global tariff, accompanied by reciprocal trade barriers against nations with imbalanced trade with the US. Despite Trump’s intent to boost revenue, secure American jobs, and bring manufacturing back home, these measures might backfire.
Analyzing 2018-2019 data, New York Federal Reserve economists found that stocks targeted by Trump’s tariffs—particularly those tied to China—performed poorly on announcement days. Furthermore, these companies experienced declines in sales, profits, employment, and productivity from 2019 to 2021.
Though Nvidia doesn’t directly import from China, its ties with manufacturing powerhouse Taiwan Semiconductor Manufacturing mean it could feel the pinch from substantial tariffs affecting semiconductor-heavy countries, impacting both margins and international demand.
As for Palantir, while it isn’t directly affected by tariffs due to its cloud-based AI services, deteriorating international trade conditions might dent overseas demand for its solutions.
Valuation: A Persistent Hurdle
Highlighting the third reason to tread carefully with Nvidia and Palantir Technologies is their valuation.
Valuing stocks can be subjective, varying by investor. However, historical trends leave little room for error for these firms.
Take Palantir: At its February peak of $124.62 per share, its price-to-sales (P/S) ratio was about 100! For context, during the dot-com bubble, leading companies like Amazon, Microsoft, and Cisco Systems had P/S ratios ranging from 31 to 43. At its height last summer, Nvidia’s P/S was 42. Even after a 41% drop, Palantir’s P/S remains around 60—a level history suggests isn’t sustainable.
While Nvidia’s P/S has decreased to 18, it still plays at a premium relative to its peers in the Magnificent Seven.
Compounding the valuation issue is the fact that the market is notably expensive. As 2025 began, the Shiller P/E Ratio, when checked against historical data, is the third-highest since January 1871. Historically, when this ratio exceeded 30 during bull runs, it eventually led to significant downturns in major indices.
When markets dip, stocks with inflated valuations often suffer significantly—an effect apparent with Nvidia and Palantir. Even with the recent slide in stocks, the market is far from cheap. With the Shiller P/E Ratio indicating potential declines, Nvidia and Palantir shares could face additional pressure.
