NerdWallet's Smart Money Podcast - AI Stocks May Be in a Bubble, and Car Prices Could Rise Soon — Here’s What to Know

Starting point is 00:00:00 Hey everyone. Remember a little while ago, Sean and I told you we were giving away some pretty cool prizes? Well, the deadline is coming up and our prizes are still just as amazing as ever. All you got to do is fill out our listener survey and not only will you be helping us make the Smart Money podcast even better, but one person is going to win a pair of Sony ULT Wireless Noise Canceling headphones and six people are going to win the Bagu Cloud Carry On Bad, which as someone who's a nerd about both of those things, I can confirm that. these are some really great prizes. Just go to nerdwollet.com slash pod survey

Starting point is 00:00:34 and complete the survey form by September 15th to shoot your shot. You can read the official rules for more details, which again can be found at nerdwollet.com slash pod survey. Thank you. Good luck. To buy a car or not to buy a car? That is the question. Whether tis a better time now before a terrace kick in or tis nobler to hang on to what you have

Starting point is 00:00:55 and drive it into the ground. With deepest apologies to Sir William, Today, we'll share some answers in non-Iambic pentameter. Welcome to Nerd Wallet's Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius nerds. I'm Sean Piles. And I'm Elizabeth Ayola. Later this episode, we'll be looking at whether it's a good time to buy a car. But first, our weekly money news round up, where we break down the latest in the world of finance to help you be smarter with your money.

Starting point is 00:01:27 Our news colleague, Anna Halhouski, is back. And Anna, we're bowing to our robot overlords today. Let's talk AI and whether it's something that's worth investing in at this point in the revolution. So AI technology has driven huge gains for companies like Nvidia. And there's a lot of excitement out there among investors for all kinds of AI companies. But there are some in the industry, including OpenAI CEO Sam Altman, who are warning that there could be a bubble forming. So today we're talking about AI stocks, the possibility that we could be in. in a bubble and how to navigate the hype. So here to give us more insight is Sam Taub, investing writer here at NerdWallet. Sam, welcome back to Smart Money. Happy to be here. So walk us through this AI bubble claim. As you said, AI excitement has driven a number of tech stocks to really dizzying highs, perhaps

Starting point is 00:02:14 none more so than Nvidia. Envidia is now worth more than $4 trillion in terms of its market cap. If it were a country, it would be the sixth largest economy on Earth. bigger than the United Kingdom, actually. And as you said, last month, OpenAI CEO Sam Altman, the head of perhaps the world's most prominent AI lab, had an interview with The Verge in which he expressed concerns that the AI industry looks a little bit like the dot-com bubble of the late 90s and 2000s. Well, that's a pretty bold claim.

Starting point is 00:02:51 So to refresh our collective memories, in the late 90s, investors were pouring a ton of money into internet companies, aka.coms. And the problem was that these dot-coms didn't have sustainable business models, or they just weren't turning a profit. So investors were driving those companies stock prices way too high. And then when they couldn't deliver, the market crashed. And when that bubble burst, internet startups went bust overnight, wiping out investor fortunes, the NASDAQ lost 75% of its value, venture capital dried up, and millions of tech workers lost their jobs. So Sam, what do other experts think about the possibility that we're in an AI bubble.

Starting point is 00:03:27 There is a growing chorus of Wall Street analysts and researchers who are a little worried about the market getting a little carried away with AI excitement. Analysts from Deutsche Bank and Morgan Stanley have both published notes warning of euphoria or overpromises or other terms like that in the last month. And also, in the last month, MIT published this very concerning report that looked at companies that are investing in generative AI in their own businesses.

Starting point is 00:04:05 According to this report, 95% of companies that are experimenting with AI right now are seeing zero return on that investment. So there definitely is some support beyond just Sam Altman for this theory that we've maybe gotten a little carried away with this stuff. But I'm assuming that this isn't a unanimous theory. What's the other side of the argument that saying that AI stocks aren't in a bubble? Going back to Wall Street analysts, there are a number that have dissented from this view since Sam Altman said this.

Starting point is 00:04:38 Analysts from Goldman Sachs and Wedbush have both published notes in the last month saying, well, the valuations of these tech companies may be justified by structural shifts in the economy due to AI that we're still in the early days of the AI revolution and that it's too early to say that things are getting out of hand. So there is some dissent here. It's definitely not a unanimous thing. So in determining whether there is an AI bubble or not, are there certain market signals that people are looking at? One of the ways that people assess whether the stock market as a whole is overvalued or undervalued is by looking at the price to earnings ratio. of indexes, like in this case, we're talking about the NASDAQ 100 index.

Starting point is 00:05:26 The NASDAQ 100's PE ratio is high, meaning it's trading for a price that is a pretty large multiple of the profits of the companies that make up the index, but it's not quite as high as it was during the dot-com bubble. And then another thing that people look at is just the price of tech stocks or of tech stock indexes and their growth rate. And again, there are some mixed signals here. The NASDAQ 100 is at an all-time high, but it hasn't doubled or tripled this year the way that it did during the dot-com bubble. And in fact, it actually had kind of a correction earlier in the year. So it's not clear whether we are or aren't in a bubble. But say that we are, what could that mean for AI companies

Starting point is 00:06:14 and for their investors? Even if we were in a bubble and even if we have a big, correction in AI stocks in the months or years ahead, that does not mean that AI is bogus. That doesn't mean that the optimism around this technology was all for nothing. After the bottom of the dot-com sell-off, the NASDAQ 100 took a number of years to reach new highs. It took actually about a decade. But now it's much higher than it ever was at the peak of the bubble in the 2000s. The internet, as we all know, because we're using it to record this podcast right now, it had real value.

Starting point is 00:06:57 People just got a little bit carried away in the 90s. An anecdote that I think is useful to illustrate this, during the fervor of the dot-com bubble, there was this company called Pets.com. It was a website that did online pet food and supply delivery. In the immediate aftermath of the dot-com bubble, this was looked back on as a really ridiculous idea and an obvious sign that we had gotten carried away and were chasing after silly ideas that were just tangentially related to the internet. But nowadays, I know that there are a few animal owners on this call, and I'm wagering that all of us have probably ordered something online for our pets from Chewy or another business like that. The point that I'm making is that often when it comes to tech bubbles, assuming there even is one, it's not that the technology is all smoke and mirrors. These bubbles sometimes form and then burst because investors were a little too hasty to throw money into these things, but it could still have very real value.

Starting point is 00:08:06 There are companies that sort of rose out of the ashes of that, right, like Amazon. Yeah. If you're an investor who owns an S&P index fund, are you already exposed to the market dynamics? of AI stocks? You definitely are, and I think that that's part of why this topic is worth talking about. NVIDIA alone is about 8% of the S&P 500 index. It's actually never been so concentrated around the biggest stock in the index. The top seven companies in the S&P 500, all of which are somewhat AI-related tech stocks like Microsoft and so on, they make up about a third. of the index. So it is pretty hard to avoid AI stocks or hedge against them. And if you want to

Starting point is 00:08:53 directly invest in AI companies or you're thinking about doing so, what's the best way to protect your portfolio? Times like this really demonstrate the importance of diversification. And diversification, as we just talked about, it doesn't just mean buying an index fund. It also means hedging your investment in stocks with investments in other types of assets like bonds. So how do you diversify? Well, there are a few pretty easy ways you can go about it. One is you can have someone else do it for you, whether that means working with a traditional financial advisor or with a robo advisor.

Starting point is 00:09:35 And I'd be remiss if I didn't mention that nerd wallet has a popular roundup of some of the best robo-advisors. And another approach is through maintaining what is sometimes called a lazy portfolio. Diversifying doesn't necessarily mean that you have to buy dozens and dozens of different investments. Sometimes just having a U.S. stock index fund like the S&P 500 and a bond index fund and an international stock index fund can be an easy way to introduce a little more diversity into your portfolio without having to research and buy a whole bunch of different individual companies or bonds or whatever. In NerdWallet's substack investing newsletter, the nerdy investor, we actually published an issue about a month ago that talked about some popular lazy

Starting point is 00:10:27 portfolio designs. So maybe we can link to that in the episode description. Yeah, we definitely can. That as well as the roundup of Robo Advisors. Sam, thanks for joining us. Thanks for having me on. Up next, we answer a listener's question about how to make a decision about a car purchase.

Starting point is 00:10:44 But before we get into that, a reminder listener to send us your money questions. Maybe you're wondering how you can take advantage of growth in the AI market or get out before the bubble bursts. Or maybe you'd like an investment strategy that avoids AI entirely and want some tips. Whatever your money question,

Starting point is 00:10:58 you can leave us a voicemail or text us on the nerd hotline. at 901 730 6373, that's 901 730 Nerd, or email us at podcast at nerdwollet.com. In a moment, this episode's money question, stay with us. We're back and answering your money questions to help you make smarter financial decisions. This episode's question comes from Vicki, who sent us an email. Here it is. I am 68 years old, and I'm buying a used car for 26,900.

Starting point is 00:11:31 $155, putting $10,000 down. I will pay it off and I fully retire in two years with my pension money. Is it smarter to take out a 60-month loan or 48 months? Thank you for your input and advice, Vicky. To help us answer Vicki's question, we are joined by our go-to car-buying nerd, Shannon. Welcome back to smart money, Shannon. Thanks, Elizabeth. I'm glad to be back. Hey, Shannon.

Starting point is 00:11:54 So I really like Vicky's question because it gets to all of the different variables that you have to consider when you're buying a car like purchase price, How much to put down, what kind of loan term to get. Before we get into these different factors, though, I want to zoom out a little and hear about the state of the car market because it's been pretty difficult over the past, say, five years. So has the car market stabilized at all or is it still as wacky as it was a year or two ago? It has been a challenging time for car buyers over the last five years. And you really have to go back to 2020 when COVID caused supply chain disruption,

Starting point is 00:12:28 shortages of vehicles and car prices hit record highs. Then you had a couple of years of semiconductor chip shortages. So when we got into 2024, inventory levels seemed to be stabilizing. And at the end of the year, car prices had dropped slightly. So there was a little bit of hope there that, you know, things were starting to improve. But as we got into 2025, the prices really did not drop significantly. they did stabilize. They have been stable all year at about $48,000, $49,000, which is well above what they were five years ago. That $49,000 mark in July, Kelly Blue Book came out and said that is the average transaction price of a new car right now. So stable, but high is the answer to that. That's rough. Wow, that is pretty expensive. When I bought my car about three years ago, I think I paid about $22,000 for it. So that's pretty high. Can you tell us what impact we're seeing from all of the tariff turmoil, if any at all?

Starting point is 00:13:31 Well, at this point, it's interesting. Most auto industry experts from the beginning expected huge increases in new car prices. Like I said, prices have been stable. In the past month or so, a long list of carmakers have released financials with billions of dollars and losses that they have attributed directly to tariffs. So it appears that the car makers have been absorbing a lot of these tariff costs. And you have to ask yourself, how long will they be willing to do that? Back to a lot of experts saying car prices are still going to go up if tariffs stay in places they are right now.

Starting point is 00:14:12 Cox Automotive just said to anticipate an increase in new car prices of about 5% to 8% by the end of the year, especially when we start to see 2006 models come out. So it's not a great time to buy a car right now, but it may be a worst time to buy a car by the end of the year. Exactly. So let's take Vicky situation piece by piece,

Starting point is 00:14:33 starting with the purchase price. Nearly $27,000 for a used car to me seems steep, but then again, I haven't really been shopping for a car for about five years. I bought my car. It was three years old when I bought it. I bought it in 2020.

Starting point is 00:14:47 It was 2016, and it was just $19,000, and had around 20,000 miles on it. So I think I got a pretty screaming deal on it. And maybe that's why I'm seeing $27,000 and thinking that is a lot more than I would want to pay. But does that number seem normal to you or is it maybe on the higher end? Unfortunately, it seems normal. I've had people recently tell me that they're going to buy a used car to avoid high car prices. And I think to myself, oh, you haven't been car shopping in a while, have you?

Starting point is 00:15:16 We don't really know the age and condition of Vicki's car. But for comparison, I'll just say that Edmonds just came out with information that in the second order of this year, the average transaction price of a three-year-old used car was a little over $31,000. That's close to the record in 2022. Of course, that's an average. You can find a cheaper car with more miles. The advice that we always give people is just to make sure that you're not overpaying what the market price is right now. By checking online guides like Kelly Bluebook and Edmonds, you just have to do your research to know what is a fair price for a car in the market right now.

Starting point is 00:16:03 Yeah. When I was shopping for my car a number of years back, I put together a little spreadsheet that listed the three cars that I was interested in, the annual repair cost, the reviews based on Edmonds and Helly Blue Book, just to make sure I could aggregate everything in one place and make a really informed decision. So anyone who is looking to buy a car might want to do something similar to make sure they have all the information they might need at their fingertips. Yes, that's an excellent idea. And I want to add, when I was buying my car, and actually, that was my first time buying a car. The car I have when I was the first one I bought. Because in London, I was taking the train bus all the time. But anywhoom, I negotiated, which was very scary, but saved me some money. So, with the economy right now, Shannon, do shoppers have room to negotiate the price of their

Starting point is 00:16:43 cars. I was talking with our producer recently about how when she went to buy a car, the dealership basically told her, here's what we'll sell you this car for, and you can take it or leave it. So is that how it is nowadays, Shannon? It really depends on where and what you're buying. The producer you're talking about was buying a Tesla and they kind of have a policy against negotiating. It's the same way if you're buying a used car online with Carvana or CarMax. they typically will not negotiate. And with inventory at dealerships being tied over the past several years, they've been less willing to negotiate.

Starting point is 00:17:20 It's especially true of three-year-old use cars because they've been in low supply and high demand. But I will say for new cars in the last several months, there have been some indicators that may be shifting a little bit. We were talking about people paying an average transaction price of around $49,000 for a new. new car right now. But Kelly Bluebook came out with the average MSRP or list price, which is what the automakers recommend a dealer charge for a new car at around $51,000. So there's a several thousand

Starting point is 00:17:55 difference there. There apparently are some people out there not paying list price. The other thing that we're seeing is that incentives and low rate financing has increased in the last month or so for people with good credit. And for a period of time, that was just non-existence. So that's an indicator that car dealerships, you know, in some cases, are willing to sweeten the deal. And then I think the final thing I would say, if you want to negotiate, a lot has to do with timing in the vehicle itself, buying at the end of the month or at the end of the year when car dealers are trying to hit quotas, you may be a little more successful. If you're buying a new car buying when the new model years are coming out, you know, buying the previous year model

Starting point is 00:18:40 when dealers are trying to clear those off the lot. That may be a better time to negotiate. Let's turn to the down payment. This is a really important part of car buying. Some dealerships will say that you can put nothing down, but that will mean that you end up paying a lot more in interest over the life of your car loan. Our listener, Vicky, put down over 35% for their car, which seems pretty steep to me. Are there general rules of thumbs that folks should think about or be a of around how much they should put down? And does this change if you're buying new or used? Yes, down payment is important. And as you said, a lot of dealers will say, oh, you don't need a down payment. But the less that you finance, obviously, the less interest you're going to pay

Starting point is 00:19:21 overall. And sometimes financing less will also score you a lower interest rate. So that that helps even more. So we usually recommend that a person should try to put 20% down on a new car and 10% down of the purchase price on a used car. That's purchase price of both. Realistically, looking at car prices right now, that is difficult for many people to do. And we recognize that. So, you know, we just say put down as much as you can. If you can't do the 20%, the 10%, anything you can put down is going to be better than nothing. You know, put it down without draining your savings, without draining your emergency account. Looking at Vicky, it doesn't look like Vicki, you know, had a hard time hitting those goals that we have for how much to put down.

Starting point is 00:20:12 Yep. They've gone above and beyond. Above and beyond. And that's very commendable. All right. So we're going to shimmy on to the loan term, which is really what Vicky is wondering about. So, Vicki, thank you for your patience as we finally get to the crux of your question. They're debating between a 60-month loan term or a 48-month term, even though they're planning to pay off the loan in a couple years once they retire. is one loan term smarter than the other? We recommend that car buyers try to keep long terms to know more than 60 months for a new car and 36 months for a used car. Again, that can be difficult for people with car prices so high because that does affect

Starting point is 00:20:53 their payment. The main thing, I think, is to be knowledgeable about when you choose a loan term, how that is going to affect what you pay overall. because so many times people are just looking at that monthly payment without realizing the total cost. Shorter long turns, increase your payment, but you'll pay less interest overall. Longer long terms are just the opposite. You're going to have a lower payment, and that makes it attractive to many people, but you'll pay more overall. So, Shannon, what might this look like for Vicki? Can you give us some numbers to see how maybe 48 versus 60 months might look for her? We don't know what interest rate Vicki is paying, but I'm going to assume for a used car,

Starting point is 00:21:38 a good credit, about 9% APR. I did run the numbers with what Vicki had given us. If she went with a 48-month term, the monthly payment would be around $420 with $3,300 in total interest over the full four years of the loan. But Vicki's paying off the loan in two years. So interest won't have as long to accrue. And in that case, the total interest cost would be about $2,400. So if you compare that to a 60-month term, the payment would be about $350, total interest of $4,200 over five years, paying it off early would drop that total interest to around $2,600. While we advise to go with the shortest term possible to cut interest costs, I think Vicki's situation is just a little different because they're paying the loan off in two years, that cuts the end of the loan off

Starting point is 00:22:36 and there is less time for the interest to accumulate. So 48 months versus 60 months only saves about $200 in total interest. Yeah, which is not a lot. $200 is $200, but it's not a huge amount. It would be a lot bigger if they were going the full term of the loan. Yeah. So the question kind of comes down to how much Vicki can comfortably afford at the moment each month for their car payment and how much they really care about the amount of interest that they'd pay. Some people hate paying interest, so they want to minimize it as much as possible. But then given that they're planning to pay off the loan in a couple of years anyway, they might be fine with that lower monthly payment, even if it means that they're paying around $200 more in interest in the short term,

Starting point is 00:23:16 which I think is pretty negligible. What do you think, Shannon? Yeah, I'd say the better choice depends on Vicki's current financial situation heading into retirement. Vicki's retiring in two years. That $420 payment is doable, then why not go with 48 months and save $200? I'm always up for saving $200. But if a $350 payment would provide more breathing room in Vicki's budget over the next two years, a 60-month term won't increase interest costs by a huge amount. So I think those are really the two factors that Vicki needs to weigh in making that decision. And the whole conversation around paying interest on a car loan has changed a little bit recently with the passage of the Big Beautiful Bill.

Starting point is 00:24:02 Folks can deduct up to $10,000 in interest on their car loan for qualifying vehicles. Now, this only applies to new vehicles, so Vicky is out of luck here, unfortunately. But, Shannon, is there anything else that folks are in the market for a new car should keep in mind as they try to take advantage of this? Yes, you know, that's one thing that when this came out

Starting point is 00:24:20 as part of the Big Beautiful bill, I think a lot of people looked at, okay, there's a $10,000 auto interest, tax deduction, and they see that $10,000 number, and that sounds really great. And we do have an article about this on our site, so lays out all of the requirements to qualify for this tax deduction. As you said, you know, the car has to have final assembly in the United States. It has to be new. It can't be a lease. You have to be the original owner of the car. You refinance that it'll still, your interest, you know, will still be deductible. But you're the second owner of a car.

Starting point is 00:24:57 this will not apply to you. And then the other thing is that it phases out the higher your income is. One of the things that I've heard is that Cox Automotive has said that you would have to buy a vehicle of $120,000 or more to realize the full benefit

Starting point is 00:25:16 of this interest deduction. Wow. And if you're paying that much for a car, I'm betting that $10,000 isn't a huge sum to you. That's absolutely right. Well, on that, note, since many of us are financing cars, we haven't talked about how to finance the car. Our listener is planning on taking out a loan for their car, then paying it off with money

Starting point is 00:25:36 from their pension. And in the past, we recommended that people come to the dealership with a loan pre-approval to give them more leverage when they're negotiating. Is that still the best practice? What should people know? So we still recommend pre-qualification and pre-approval, and there are several things that people need to know there. Pre-qualification with a soft credit check, that's a way to see if you might qualify for a loan,

Starting point is 00:26:02 how much you might qualify for at what rate, without affecting your credit scores. But it really is just an estimate because the lender is basing it on less information about you since they haven't done a hard credit pool. Those numbers can change. They're less of a commitment from the lender. Pre-approval usually requires a hard credit inquiry. which will cause a slight and temporary drop in your credit scores. Because the lender knows more about you, it is more of a commitment.

Starting point is 00:26:32 It's less likely to change. And we do recommend that car buyers get pre-approvals to take if they're buying at a dealership because they can take that pre-approval in and say, hey, here's the low rate I found somewhere else. Can you beat this rate? So it's a good way to, you know, get the lowest rate possible. Two things I do want to mention. I have found that many lenders use the terms pre-qualification and pre-approval interchangeably. So it's always a good idea just to say, hey, if I submit this application,

Starting point is 00:27:04 will I have a hard credit inquiry? Because if you're just kind of shopping around, you're not sure if you want to buy a car, the last thing you want is a surprise hard credit inquiry in your credit report. The other thing is that getting pre-approvals, you know, try to do that within a two-week time. span, because if you do that, then it will only count as one inquiry on your credit report. That's smart. Okay. So one thing I'm thinking about in this entire conversation is the fact that Vicki's planning to pay off their car in two years. So does that change the calculus with all of the

Starting point is 00:27:43 factors that we've considered so far? And paying off this loan shouldn't be an issue for them, right? There shouldn't be an issue with paying the loan off early. Vicki might want to be. to ask the lender if it charges a prepayment penalty, but that really is not a common practice anymore for auto lenders. I have not found one in the long time that has a prepayment penalty. One thing I might question is the use of the pension to pay off the loan. We don't know anything about Vicki's pension or tax situation, and even if I did, I am not a tax expert. But if they haven't done it, it might be a good ideal to talk to a tax advisor, to understand the implications of any taxes or loss of investment income, and whether using that pension is the best way

Starting point is 00:28:31 to pay off the loan. Yeah, that's great advice. And anytime folks are planning for a major life change, like maybe getting married or moving somewhere or retiring, it's a smart idea to talk with a financial planner of some sort so they can give you an understanding of all the variables at play and how you might want to best allocate your finances. That's right. Shannon, I have learned so much, and I'm sure the listeners have too. Do you have any final thoughts you want to leave our listeners with? Yes, I think, you know, given the topic today and everything we've talked about, I'd remind people that an auto loan calculator is your best friend and nerd wallet has a great one on our website. If you have questions about long terms like

Starting point is 00:29:11 Vicky, the calculator will let you run different scenarios based on the purchase price of the car, your down payment amount, various rates, at different terms. So you can see the overall effect that will have on not only your monthly payment, but the total cost that you're going to end up paying for the vehicle. So using those tools along with the other things we've talked about, pre-qualification and pre-approval so that you can shop rates, using online guides to see how much you should be paying for a car. These things have always been important, but I personally feel that they're more important now when car prices are so high and there really isn't any indication that they're going to start falling anytime soon.

Starting point is 00:30:00 All right. Well, Shannon, thank you so much for coming on and sharing your insights with us. Well, thanks for having me back. I always enjoyed being here. And that's all we have for this episode. Remember, listener, that we're here to answer your money questions. So turn to the nerds and call or text us your questions at 901-7306373-901-730 NERD. You can also send us an email at podcast at nerdwollet.com. Join us next time to hear about whether using your phone to pay can lead to overspending. Spoiler alert, it can. Follow smart money on your favorite podcast app, including Spotify, Apple Podcasts, and IHeartRadio to automatically download new episodes.

Starting point is 00:30:38 And your favorite brief disclaimer, we are not your financial or not. investment advisors. This nerdy information is provided for general educational and entertainment purposes, and it might not apply to your specific circumstances. This episode was produced by Tess Vigland and Anna Halhouski, Hillary Georgie helped with editing, Nick Kerosamy, mixed art audio, and a big thank you to NerdBalt's editors for all their help. And on that note, until next time, turn to the nerds.

NerdWallet's Smart Money Podcast - AI Stocks May Be in a Bubble, and Car Prices Could Rise Soon — Here’s What to Know

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.