Why BlackRock's Rick Rieder feels 'a bit more relaxed' about AI bull market than dotcom era

Rick Rieder oversees roughly $2.4 trillion in assets for BlackRock. He has been at the world's biggest money manager for close to two decades now, and he has seen a lot take place in the market. But, he says, nothing like this.

"I think we're going through an extraordinary period of time. I don't think we've ever seen anything like this," he told CNBC's Scott Wapner at the CNBC CEO Council Summit in Washington, D.C., on Tuesday.

Faced with the choice between "a lot of uncertainty" and a market that continues to push higher, Rieder concludes, "I think you gotta, you gotta stay in it."

This view is not new for Rieder. He told Wapner in August of last year that this was the best investing environment he had ever seen. But nothing has changed his view to the contrary since, even as the mega-cap tech stocks spend more and more on AI and concerns rise about a dotcom-bubble like environment. His view of the stock market is not necessarily for outsize gains from here. A market that is doing "extremely well," he said, "will probably continue to do okay."

But Rieder says the trends are in place, both structurally and technically, to believe the bull market has more room to run. For one, the cash keeps coming in. "There's a tremendous amount of cash," he said. "Even with the IPO calendar, which is large. There is still a tremendous amount of buyback going on, so I think 'the technicals' are good," he said.

Part of the bullish story coming from the cash is related to central bank rates in developed markets that are going to remain elevated, he said, and maybe even go "a bit higher."

The income streams being created from higher-yield portfolios — 6% to 7% in the current market without a lot of risk, Rieder said — benefit from the compounding effect, for one, and that also allows investors to ultimately "buy some volatility," he added.

Whether the longer-term risk in stocks is still worth it relative to the opportunity for yield in bonds has become a more pressing question among investors. But Rieder, who is chief investment officer of global fixed income as well as head of the global allocation investment team at BlackRock, says the cash keeps wanting to be redeployed in stocks, in his view, due to trading multiples and earnings growth forecasts that are more reasonable than investors may assume.

"First, strip out semis and tech and look at what the equity market is doing. Not terribly spectacular," he said. "Six percent." 

"Are there some days that I look at some of those equities and say 'okay, that's a bit much?'" Rieder said.

The answer is yes, and those kinds of days have become more frequent lately with individual stocks up 20%, even 30%-plus, like Snowflake, Micron Technology, Dell, and Hewlett Packard Enterprise.

"Then I go back and look at the multiple ... you can get your arms around this," he said.

Rieder noted the price-to-earnings ratios in tech stocks, and semiconductor stocks, are lower today than they were last October. But projected earnings growth, one year forward, has gone higher. "You're talking about 20%-plus earnings growth, that is incredible," he said.

The so-called "Mag 7" tech companies, in particular, have a current P/E ratio at 26, and earnings growth that is expected to be over 30% in some cases (for the Mag 7 as a whole, the current blended rate is 27.6% growth).

The S&P 500 forward P/E ratio is currently 21, and has also come down from last fall, as the one-year earnings growth forecast for the index, currently just north of 20%, has climbed.

Buying at current multiples, Rieder said, is "actually not that scary."

He said for some stocks it may be easier to have confidence in a demand function that he described as "pretty powerful" over the next 2-3 years rather than conviction the earnings growth will play out perfectly to the Wall Street prediction. But for the Mag 7 stocks, "the earnings power that they're creating ... the forward earnings potential, that is pretty powerful," he said.

Rieder currently serves on Alphabet's Investment Advisory Committee.

There are good reasons to be cautious, as Rieder says he has done with some stocks. Rieder is worried about "crowding ... not just not just in overall markets, but in single-name stocks, where you see more crowding, more momentum trading than I've ever seen before," he said.

One way he deals with the rapid price action in stocks is to take some risk off the table through hedging his equities' exposure — Rieder overwrites a lot of the stocks in his portfolio through the options market, especially stocks that have run up a lot. He gave Micron Technology, which has risen over 200% this year, as a recent example. "I sold call options at 95 'vol' after the thing just ran up like that, so it's pretty extraordinary. It's not only that the buying is taking place ... people are willing to pay up for the continued acceleration of that, which is remarkable," he said.

The level of financing that is taking place in the market is also reason for caution, he said. "I will tell you, I spent, I don't know how much of the weekend, a lot of it, going through new issuance coming ... debt markets, equity markets, convertibles, different forms of loans. There is a lot of financing that's taking place and that gives you a little bit of pause, that it's all coming as fast as it's coming down the pike today. ... You still have to find room for some of this."

Specifically with the big-name tech stocks and broader stock run linked to AI optimism, the ongoing debate over the return on invested capital that is ultimately generated from all this capex — Alphabet's $80 billion equity issuance being the latest example of how the spending numbers keep going higher — is a risk factor that Rieder said BlackRock spends "a lot of time" studying.

But he added, "the difference between now and the internet bubble is about as different as it could ever be."

The "smart companies" raising capital today not only need it for capex, but are doing so alongside real cash flow that they can use to fund future growth. Therefore, compared to the dotcom bubble, "I feel a bit more relaxed about it," Rieder said.

The dynamic infrastructure spending environment could ultimately force a reckoning in the stock market, and will remain a big unanswered question. But Rieder is of the opinion that won't be decided soon enough to change his stance on the market having more room to run in the short-term. With strong forward demand and "pretty sizable" backlogs of business, "my sense is we won't know the answer for a year or two," he said.