The performance of the stock market so far in 2023 caused a collective sigh of relief on Wall Street. After turning in the worst performance in more than a decade last year, the major market indexes are all showing growth of more than 20% from their recent lows, causing some market commentators to say a new bull market is underway.

Helping fuel the gains in 2023 are rapid advances in artificial intelligence (AI), led by the debut of ChatGPT late last year. The breakthrough technology, dubbed generative AI, offers a host of potential applications that could lead to rapid productivity gains. The potential being discussed is driving many technology stocks higher.

But not everyone is so bullish. A report issued by Morningstar analyst David Sekera concludes the resulting exuberance might have driven some stocks too far, too fast. As a result, he says it's time to sell three of this year's biggest gainers.

Let's take a closer look to see if Sekera is right.

A person looking at a mobile device while seated at a computer desk with an overlay of AI algorithms and stock price graphs.

Image source: Getty Images.

Is this a case of irrational exuberance?

"(The) technology sector (is) becoming overvalued as stocks surge on excitement surrounding artificial intelligence," Sekera wrote. The analyst goes on to point out that just 10 growth stocks -- all with ties to AI -- have done all the heavy lifting for the S&P 500 so far this year.

He calls out Nvidia (NVDA 4.05%), Apple (AAPL 1.84%), and Broadcom (AVGO 3.23%) -- which collectively account for roughly 40% of the S&P's gains so far this year -- as being the most high-profile examples. This is in stark contrast to the beginning of 2023 when nine of the top 10 market movers were undervalued.

"The rally thus far this year has been heavily concentrated in the growth category, which has soared 19.29%, whereas core stocks have lagged, only rising 2.11%, and value has lost ground, at -2.23%," Sekera noted. "While select individual opportunities remain, from a sector perspective, we now think this is a good time to take profits and move toward an underweight (read: 'sell') position."

What's driving the gains?

The excitement caused by generative AI is certainly understandable. Named for its ability to create original content, the list of potential applications is growing, and with it, estimates regarding the size of the resulting opportunity.

Analysts at Morgan Stanley predict the opportunity represented by generative AI will amount to roughly $6 trillion in the coming years, while their counterparts at Goldman Sachs forecast the technology could increase global gross domestic product (GDP) by $7 trillion over the next 10 years. 

These optimistic predictions have investors buying up AI-related stocks hand over fist, while also driving their valuations higher. As of this writing, Nvidia is selling for 53 times forward earnings, while Apple and Broadcom sport price-to-earnings (P/E) ratios of 31 and 20, respectively.

To give those numbers context, the P/E of the S&P 500 is currently 25. So, from that perspective, at least two of these valuations appear somewhat lofty -- at least when viewed from a short-term perspective. Those with the intention to hold for the next decade have a different view.

There are opposing viewpoints

Not everyone shares Sekera's opinion. One example is Wedbush Securities analyst Dan Ives, who recently said generational AI will fuel the "fourth Industrial Revolution," which could drive some stocks significantly higher for years to come (emphasis in the quote below mine):

While many of the tech skeptics will point to today as a "1999 moment" a la on the verge of the dot-com bubble/collapse, given the significant move in tech valuations, we strongly disagree. The massive $800 billion AI opportunity (our estimate) is now on the doorstep for the tech sector for the next decade, and real monetization of AI is happening much sooner than expected.

Given these diametrically opposed opinions, who's right?

Both viewpoints could be right

It's worth noting that Sekera said he believes that the tech sector is currently "trading at a 4% premium over our intrinsic valuations." Historically, when analysts refer to their fair-value estimates, they're talking about where they believe the stock will be over the coming 12 to 18 months. At the same time, it's clear the advances and benefits from AI will play out over years or even decades.

In the grand scheme of things, 4% isn't much, particularly when you are thinking in terms of 10 years or more. For example, the S&P 500 has gained more than 173% over the course of the past decade, while Nvidia, Apple, and Broadcom have far outpaced the broader market, as illustrated in the chart.

NVDA Chart

Data by YCharts

Nvidia is the industry-leading supplier of chips used to train AI systems, controlling an estimated 95% of the market, according to data compiled by New Street Research. AI underpins a broad cross-section of the functionality developed for the iPhone, which has helped Apple become the largest and arguably the most successful company in the world. And Broadcom's custom processor business is well-positioned to benefit from AI.

Sekera could well be right that the market leaders could be in for a decline -- even a significant one -- in the coming weeks or months. At the same time, Ives is likely also correct that over the longer term, these stocks could continue to soar.