Photo by Steve Johnson on Unsplash

Stock market valuations remain at or near historically high levels, which has been a concern among many investors. The 10-year inflation adjusted Shiller P/E ratio, which tracks the S&P 500, is now at 40, higher than it was during the 2021 crash. It hasn’t been this high since 1999 when it hit 49.

The P/E ratio of the Nasdaq 100 is at 39, slightly higher than 2021 or 1999.

Few people know more about technology stocks than Cathie Wood, founder, CEO, and CIO of Ark Invest, which runs the Ark family of technology and AI focused ETFs, including the Ark Innovation ETF (CBOE: ARKK). On Tuesday, Wood shared some thoughts on the state of the markets while attending the Future Investment Initiative in Riyadh, Saudi Arabia.

In an exclusive interview with CNBC, Wood stopped short of calling it an AI bubble, but she did express some caution.

“I do not believe AI is in a bubble,” Wood said in the CNBC interview. “What I do think is, on the enterprise side, it is going to take a while for large corporations to prepare themselves to transform. It’s going to take a company like Palantir going into the largest enterprises and really restructuring them in order to capitalize on the productivity gains that we think are going to be unleashed by AI.”

Dialing back on some expensive AI stocks

Recent portfolio moves in the Ark Innovation ETF indicate that Wood and her team are mindful of some of the rising valuations, as she sold shares of Palantir (Nasdaq: PLTR), AMD (Nasdaq: AMD), Roblox (NYSE: RBLX), and Shopify (Nasdaq: SHOP), which have sky-high valuations.

In turn, recent buys across Ark Innovation and Ark Next Generation Internet ETF (CBOE: ARKW) include the fintech Block (NYSE: XYZ), Robinhood (Nasdaq: HOOD), penny stock Pacific Biosciences (Nasdaq: PACB), Intellia Therapeutics (Nasdaq: NTLA), Baidu (Nasdaq: BIDU), DraftKings (Nasdaq: DKNG), and Netflix (Nasdaq: NFLX), most of which are cheap, unprofitable, or dropping in value.

So, while Wood does not see an AI bubble bursting, that doesn’t mean there won’t be corrections.

“We think the valuations will make sense longer term, so you really do have to have a longer term time horizon,” Wood said. “I’m not saying there will never be any corrections, of course there will, as many people worry is this too much, too soon, but if our expectations for AI, especially embodied AI [robotics, etc] are correct, we are at the very beginning of a technology revolution.”

A “shudder” to the markets

When asked about a potential timeline for a potential correction, Wood laid out a scenario where it could happen.

“I think we’re going to reach a moment in the next year where the conversation will shift from lower interest rates to rising rates,” she said. … “I think when interest rates reverse, there will be a shudder, because there are a lot of people out there, and we saw this during COVID and its aftermath, who think that innovation and interest rates are inversely correlated, but that is not true over history.”

Nonetheless, she said when that happens, “We think there will be a reality check, shall we say.”

Ark Invest’s ETFs have all been surging this year, after a few difficult years, hampered by high interest rates, inflation, and other factors.

Ark Innovation is up 56% year-to-date, while Ark Next Generation Internet is up 65%, and Ark Fintech Innovation has gained 57% YTD.

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