A reader asks:
I’ve never bought into the idea that AI is a bubble because the technology clearly has value in the real world. But I’m starting to see some dot-com era parallels, with companies like Uber and Amazon publicly announcing that their big spending is yielding uncertain returns, more businesses like All Birds turning to AI, and celebrities like Tristan Thompson promoting AI-related investments. AI could ultimately be transformative and profitable, but could it still experience a bubble due to overspending, hype, and unrealistic expectations?
I asked this question three years ago in an article titled. Is the AI Stock Market Bubble Inevitable?:
If this makes us 50% productive and efficient, as some advocates predict, it seems inevitable that it will lead to a bubble.
When it comes to new and exciting technologies, we can’t help ourselves.
The creation of fiat currencies and new types of capital investments led to the formation of the South Sea bubble in the 1700s.
The introduction of trains led to the railroad craze of the 1800s.
The explosion of new consumer and investment products led to the Roaring 20s.
The emergence of the Internet led to the dot-com bubble in the 1990s.
Each of these innovations changed the world in many ways. But speculation in the early stages of these innovations led to massive booms and painful crashes.
There are no guarantees when it comes to financial markets, but human nature is the one constant in all market environments.
The week I wrote this, Nvidia’s market cap was $755 billion. How interesting.
More than $5 now trillion.
Since Micron joined the club in recent weeks, there are now $11 trillion companies:
Micron, Sandisk, Samsung, SK Hynix etc. Semiconductors such as are booming higher than AI structure. Money is flowing into these stocks.
Roundhill has a new thematic ETF focused on this segment, and the growth is unorthodox:
Only 35 days to reach $10 billion!
Accordingly Private Investment Researchtechnology and communication services1 sectors now make up half of the S&P 500, matching the weight of all 9 other sectors:
It is certain that AI checks all the boxes.
It’s a capital spending spree. This is a great innovation. The returns are off the charts. There is concentration. Money is flowing.
If it walks like a duck…
I think the tech bubble talk is getting a little stale at this point. It feels like we’ve been discussing this for ten years. Artificial intelligence has added fuel to the fire.
There is an old saying that those who do not learn history are doomed to repeat it. You could also argue that those who live and die in the past are doomed to be overconfident in their predictions about the future.
A study of market history shows that there are often surprising results. I’m keeping an open mind about how this will all play out.
Cliff Asness once said: “The term bubble must designate a price that no reasonable future outcome can justify.”
There seems to be a plausible future outcome that this AI boom could justify. Look at how fast Anthropic and OpenAI’s revenues are growing:
Anthropic’s annual revenue rose from $9 billion to $47 billion just a year ago, and that figure continues to rise. Growth is unreal.
Micron is up a crazy 1000% in the last 12 months. Now look at earnings expectations:
This doesn’t seem real.
The S&P 500 also saw a big jump in earnings expectations:
Maybe these gains are just a byproduct of excessive scaler spending.
Maybe it’s all an illusion.
Maybe this really is a bubble doomed to burst.
But you should also consider the possibility that AI will be adopted quickly enough to keep the market gods at bay.
Neither result would surprise me.
People have been trying to predict a new bubble every year since the Great Financial Crisis. Many people are sure that this has finally happened.
In times like these, it is necessary to be a little humble.
I answered this question in a brand new episode of Ask Compound:
I’ve also covered questions about SpaceX’s IPO, investing in bonds during retirement, AI’s impact on the labor market, supporting your mother-in-law who isn’t saving enough for retirement, and balancing all your financial goals in retirement.
Further Reading:
Is This a Balloon?
1Communication services are basically technology. The largest holdings are Google and Meta.
