Stock markets continue their upward trajectory, defying warnings of an impending AI bubble burst. The S&P 500 and tech-heavy Nasdaq have reached historic highs, driven by investor enthusiasm for artificial intelligence. However, analysts caution that the rally is unsustainable, with the top 10 companies in the S&P 500 accounting for about 40% of the index's total market capitalisation—well above the 27% peak during the 1999-2000 tech bubble.
Expert Warnings Ignored as Markets Climb
City analysts and financial economists have been warning of a crash for years, but their predictions have been premature. Ludovic Subran, chief investment officer at Allianz, noted that SpaceX's decision to borrow $25bn through a bond sale shortly after raising $86bn from its listing in New York is a clear sign of "bubble territory." Similarly, 87-year-old Jeremy Grantham, founder of a major asset manager, said the AI bubble is about to burst and he is selling up.
Dhaval Joshi, head of global strategy at BCA Research, described the current situation as "the madness of crowds," citing a study that shows markets can shift from wisdom to madness when investors' views become correlated. He warns that an economic recession or aggressive interest rate rises could trigger a crash.
The Magnificent Seven Dominate
The focus is on the "Magnificent Seven"—Amazon, Alphabet (Google), Nvidia, Meta (Facebook), Microsoft, Apple, and Tesla—which drive much of the market's gains. Investor appetite waned earlier this year when these companies began borrowing to fund AI investments, but the fear of missing out kept most investors in the game. Even geopolitical tensions, such as Donald Trump's threats toward Iran, caused only short-lived panic.
Grantham argues that AI, like railways or the internet, leads to overinvestment. He notes that Google and Meta are advertising businesses unlikely to sell enough ads to justify their share prices. "It is disturbing that the 10 largest companies in the S&P 500 account for about 40% of the index's total market capitalisation," he said.
Why the Bubble May Persist
Despite the warnings, the AI bubble has further to run. The top 10 companies are generating huge profits, the US president is prepared to keep financial markets happy, and global savings are seeking a home. "A crash is coming, and there isn't a crystal ball that will foretell the trigger," the article states. "All we can say at the moment is that everyone in financial markets is working very hard to delay the day of reckoning."
