AI bulls confront another valuation test

Will AI-bullish investors withstand another valuation test?

AI

Our topline view has not wavered: we remain bullish on artificial intelligence (AI). We believe it will change how businesses operate and create opportunities we probably haven’t even considered yet. But has some of the enthusiasm pushed valuations too far? In our view, probably—and that makes it increasingly important to look closely at individual companies. Tesla’s latest results, for example, illustrate why investors are uneasy. Yes, the company generated positive free cash flow in the third quarter, defying analysts’ expectations for a significant cash burn rate,¹ but it also reduced its 2026 capital expenditure forecast by 20%. Better cash generation is encouraging, but investors are asking what lower spending means for the pace of its AI, robotics and autonomous-driving ambitions. We’ve seen this pattern several times. Investors become nervous about business models, immense capital spending and how companies will generate profits. Strong earnings then restore confidence, followed by another round of spending or borrowing to bring those questions back. This time, the uncertainty seems to be lasting longer and the amount of capital significantly larger.

The central issue is timing. How long will companies need to keep spending before those investments translate into sustainable cash flow? The further out that payoff sits, the harder it becomes to determine what a business is worth today. Even investors who believe strongly in AI can become uncomfortable with the price they’re being asked to pay today. Changing compute costs add another complication. Cheaper computing could alter the outlook for different parts of the industry, including memory suppliers. Those economics are evolving quickly, making it difficult for investors to know which assumptions will hold. Some companies can justify their valuations—and others are being priced for achievements they may struggle to deliver. That’s where selection comes into play.

Bottom line: We remain very constructive on AI, but investors need to separate companies with supportable valuations from those relying on overly ambitious expectations.

Energy

Oil prices have risen, but we still think the near-term risks could justify higher levels. As of this writing, West Texas Intermediate (WTI) crude sits above $100 USD as concerns about escalation in the Middle East intensify.² We see further pressure and continued disruption for energy markets, so the question is: why haven’t prices moved even higher? One answer is that reduced Chinese purchases and withdrawals from inventories have helped absorb the supply shock. China’s crude imports fell early in the Iran conflict and remain below pre-war levels—but they are moving higher, and the relief that demand drop brought will likely continue to diminish. The market is pricing in expectations for Chinese imports to exceed 10 million barrels a day in October, or their highest level since March.³ Our view is that a prolonged disruption should push prices higher, with further military escalation adding to that risk. We don’t expect a lasting resolution before the U.S. midterm elections, and the period afterwards could bring further escalation. That being said, a resolution would quickly change the picture. Oil may fall sharply, and investors should recognize that possibility, but even then we believe prices could remain profitable for many energy companies. Replenishing reserves, rebuilding infrastructure and adjusting supply routes takes time. While our constructive outlook has led us to increase Canadian equity exposure over the past month—alongside the opportunities we see in metals and other commodities in the Canadian equity market—the view extends to global energy as well.

Bottom line: We see further near-term upside risk in oil and opportunities in global energy, while recognizing that a resolution could reverse prices quickly.

Tesla & SpaceX

A potential merger of Tesla and SpaceX makes strategic sense to us. Elon Musk’s ambitions increasingly connect the businesses, and a common structure could help coordinate technology, investment and management attention. The scale would be substantial. A potential combination would be worth roughly $3.5 trillion USD, although that is an implied valuation rather than an agreed transaction price. Discussions are underway, but terms have not been settled. SpaceX’s results also show why investors are interested: third-quarter revenue reached $14.6 billion USD, with AI contributing more than half of the total. AI revenue rose more than ninefold to $7.6 billion USD, largely from renting computing capacity, while capex nearly tripled to $19.6 billion USD.⁴ Those figures capture both the commercial opportunity and the investment required to pursue it.

Bottom line: A merger could offer strategic benefits, but governance, deal terms and the resulting index weight would all warrant close attention.

Positioning

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Trick or treat? Stubborn risks meet market optimism.

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Originally Posted October 26, 2026 – AI bulls confront another valuation test