Warnings are mounting on Wall Street in the United States that the investment frenzy related to the artificial intelligence (AI) industry is overheating. As stock prices of AI-related corporations and investment expenditure have soared to all-time highs, concerns are growing that the market may have entered a bubble phase.
According to Yahoo Finance and other foreign media on the 20th (local time), Jamie Dimon, JP Morgan chief executive officer (CEO), said at a recent meeting with reporters, "Asset price gains have entered a worrisome category," adding, "When prices rise, they eventually have no choice but to fall." Dimon warned, "There are many assets that have entered the bubble zone," and "that means the risk of losses is increasing."
These remarks reflect Wall Street's anxiety that investors' "AI optimism" is racing to extremes. In a global fund manager survey released by Bank of America (BoA), respondents for the first time cited an AI stock bubble as the world's biggest risk. More than 200 fund managers who took the survey said their average cash holdings fell to 3.8%, a level observed when risk appetite is at an extreme.
Overheating signals also appeared in institutional investors' positions. According to research firm DataTrek Research, large institutional investors increased their share of risk assets for five straight months, and cross-sector stock price correlations fell to their lowest level since the start of the bull market. This is a phenomenon commonly seen when investor sentiment is excessively optimistic.
The AI investment race is fierce among corporations as well. Google decided to build a $15 billion data center in India, and AMD, a competitor to Nvidia, signed a new chip supply deal with Oracle. Walmart has partnered with OpenAI to strengthen AI-based retail tools. OpenAI, for its part, has been signing contracts in succession with Broadcom, AMD, and Nvidia, pursuing supply chain diversification.
However, CNN reports that this AI investment boom is already approaching the level of a "world's biggest bubble." Julien Garran, a market analyst at U.K. research firm MacroStrategy Partnership, said in a recent report, "The AI industry is a capital allocation error bigger and more dangerous than any bubble humanity has experienced," arguing, "The current AI frenzy is 17 times bigger than the dot-com bubble and four times bigger than the 2008 housing bubble."
Garran said, "The AI ecosystem has structural limits that prevent it from generating revenue on its own," noting, "While only Nvidia is posting explosive revenue, most data center, large language model (LLM) developers, and startups are in the red." He warned, "The AI industry is close to a 'permanent fundraising tour' sustained by investor money," adding, "If the investment dries up, the entire industry could collapse."
He also mentioned the technical constraints of LLMs. "LLMs are ultimately nothing more than statistical prediction tools based on past data," he said, adding, "The creative innovation claimed by AI corporations is overrated." In fact, there has been no large-scale performance leap since OpenAI's GPT-4, and the market is pointing to the absence of the "killer application," the key that determines the success of new technology.
Michael O'Rourke, chief strategist at Wall Street brokerage JonesTrading, also said, "We are in the middle of an AI bubble," adding, "The $1.5 trillion AI build-out plan is a snapshot of investment detached from corporate earnings." He said, "Investors are so focused on the future of the technology that the disconnect from reality is pronounced."
On the other hand, some analysts see the current AI rally not as mere mania but as a reflection of technological conviction. Lale Akoner, global market analyst at online investment platform eToro, said, "It is hard to call this an AI bubble," adding, "Investors are assigning more value to the story than execution, but that is part of a perfectly legitimate price-discovery process." Akoner added, "Investor sentiment is not in an excessively frenzied phase," and "large tech stocks still maintain solid financial structures."
Market experts believe that, ultimately, the future earnings of leading AI corporations will be the inflection point that determines whether this is a bubble. Nicholas Colas, co-founder of research firm DataTrek, said, "If the results from Nvidia, Microsoft, and Alphabet fall short of expectations, optimism could quickly fade," adding, "It will soon be decided whether the AI frenzy leads to real innovation or ends as a replay of the dot-com bubble."