Is there a Bubble Forming?
To answer that, let’s first clarify what a bubble is: In financial markets, a bubble arises when asset prices surge dramatically beyond their intrinsic value. This is typically fueled by investor exuberance, rampant speculation, and often, heavy leverage. Such growth becomes unsustainable, detaching from economic fundamentals. Eventually, as confidence wanes, demand collapses and the bubble bursts, triggering sharp market declines, widespread losses, forced liquidations, and economic reverberations.
Andrew Ross Sorkin’s newly released and fascinating book, 1929: Inside The Greatest Crash In Wall Street History, chronicles one of the most dramatic bubbles ever. The infamous 1929 stock market crash wiped out 89% of the Dow Jones Industrial Average. In more recent history, we’ve seen two other catastrophic bubbles (shown in two graphs below):
The Dot-Com Crash (2000): – The NASDAQ Composite peaked at 5,048.62 on March 10, 2000. – It plummeted 78% by 2002, bottoming at 1,139. – Recovery took nearly 15 years, with the index finally closing above its 2000 high in April 2015.
Japan’s Real Estate and Market Collapse (1990s): – The Nikkei 225 hit a record 38,915.87 on December 29, 1989. – It then fell into a prolonged slump, bottoming near 7,000 in 2009—a drop of about 80%. – The index didn’t surpass its 1989 peak until February 2024—34 years later.
What About AI? Unlike those previous bubbles, the current excitement around artificial intelligence is grounded in real, transformative potential. While revenue models are still emerging, AI investment is accelerating across nearly every sector, from software and finance to healthcare, manufacturing, transportation, and more. I anticipate U.S. capital expenditures on AI alone will total around $3 trillion over the next four years. This excludes the ongoing operational spending (OpEx) needed to maintain and scale these systems. The productivity gains AI promises are likely greater than currently estimated.
Bubble or Boom? Yes, the momentum in AI markets is enormous. The opportunity is real, but so are the risks and challenges. Still, it’s unlikely that this will evolve into a full-blown bubble. A market correction? Yes, it’s possible, even likely. But a speculative frenzy detached from economic reality? That seems doubtful.
?Takeaway: Perhaps the biggest bubble is in people speculating AI is a bubble |
