Introduction
As the world closely watches developments in artificial intelligence (AI), there’s an underlying tension in financial markets. Many experts are raising red flags about potential bubble conditions reminiscent of past economic crises. The following exploration offers insights into current market behaviors and the precarious balance surrounding AI investments.
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This blogger typically shies away from stock market discussions, given their propensity to be influenced by manipulation and excessive optimism, especially regarding share buybacks. Presently, the U.S. economy seems increasingly reliant on a handful of companies making enormous bets on AI technologies, often without the financial backing to justify such risks. Most of these investments focus on large language models (LLMs), which have consistently proven to yield unreliable results. A recent MIT study shows that a staggering 95% of pilots at companies are failing, yet the fervor surrounding AI’s so-called inevitable success remains unbridled.
For a more grounded perspective filled with contrarian details, check out Ed Zitron’s latest post, where he points out the scarcity of evidence supporting improvements in LLMs. He makes several poignant observations, including:
We find ourselves in a period of significant tension. Mark Zuckerberg suggests we might be in a bubble, Sam Altman agrees with the bubble sentiment, and Joe Tsai, Chairman of Alibaba, voices similar concerns. Furthermore, Apollo has pointed out the bubble, indicating that many are not turning profits and many seem to have lost sight of their original purpose, merely rushing to invest.
Moreover, they’ve yet to substantiate how generative AI justifies these massive expenditures.
Recall that Alan Greenspan famously described dot-com valuations as “irrational exuberance” at the end of 1996, a bubble that didn’t begin to deflate until March 2000, culminating in a dramatic final phase before its collapse. During the internet boom, companies provided colorful explanations for business models that were never likely to yield profits, often evaluating based on “eyeballs.” It’s uncertain whether a similar evaluation framework exists for AI. Zitron and other analysts indicate that these major investors are seeing minimal revenue and profits, and they have yet to clarify how that might change.
Rather than speculate about a potential cash turnaround for AI investments, let’s focus on what could happen if this wave of enthusiasm subsides. Historically, stock market crashes that aren’t significantly driven by leverage do not usually trigger financial crises, such as the Asian crisis or the 2008 banking collapse. Unfortunately, if banks are damaged and recovery measures are ineffective, the risk of bank runs increases, hampering payment systems and financial markets.
However, the dot-com crash followed a period of sustained U.S. growth and political stability, devoid of substantial private debt. Conversely, today’s market shows stark contrasts between transformative investor enthusiasm for AI and gold’s rise above $4,000—an alarming signal of distrust toward financial assets and the dollar.
The Financial Times reports that the IMF and the Bank of England have issued warnings regarding a potential abrupt market correction due to the AI boom pushing valuations toward unsustainable heights:
Global stock markets face the risk of a sudden correction as the AI boom drives valuations toward levels reminiscent of the dot-com bubble, according to both institutions. Kristalina Georgieva, IMF managing director, expressed concerns that optimistic market perceptions around AI’s productivity potential might “turn abruptly,” negatively impacting the global economy. She observed that current valuations are nearing those seen during the late 1990s.
Predictably, the narrative of “this time is different” has emerged, even coming from a Fed official. Mary Daly, head of the San Francisco Fed, downplayed concerns about an AI bubble threatening financial stability, citing a “good bubble” full of investment potential even if not all returns are realized.
As the market peaks, a classic indicator is the capitulation of remaining skeptics. Comments on financial news articles often reveal little negativity regarding AI and instead dismiss government warnings. Notably, similar caution from the Bank of England preceded the 2008 crisis.
Prominent financier Jamie Dimon sounded alarm bells regarding heightened risks of a serious dip in U.S. stocks, stating that his concerns are greater than those of others regarding a possible correction in the next one to two years. While he emphasizes broader economic risks over AI specifically, he highlighted that many current stock market gains have stemmed from investments in AI, which presents significant instability.
Compounding these market fears is the heavy dependence of U.S. growth on AI developments. Recently, analysis by Jason Furman revealed a mere 0.1% growth in the U.S. economy over the first six months of 2025, almost entirely driven by AI investments.
In addition, a recent article from the Financial Times discusses how an overwhelming proportion of current U.S. GDP growth—almost 40%—is fueled by corporate investments in AI:
The current surge in AI investment accounts for a striking 40% share of U.S. GDP growth, with expectations that this figure could be even higher when accounting for all AI-related spend, indicating how intertwined these investments are with the economy’s performance. Since the wealthiest segment of the population possesses the majority of U.S. stocks, their investment activities significantly influence consumer spending, underlining an uneven economic recovery heavily reliant on AI.
Despite optimism around AI serving as a panacea for vast economic threats, the reality paints a more nuanced picture. No global economy has faced an immigration boom-bust cycle comparable to the one currently impacting the U.S. Additionally, skyrocketing government deficits put increased pressure on the economy, leading to speculation about a potential crisis should AI underdeliver.
In a backdrop of rising distrust in the dollar, the financial landscape shows signs of instability. A comprehensive analysis by VoxEU notes that while the dollar regained its status as a safe haven, concerns linger regarding foreign holdings and market vulnerabilities. If capital expenditures fall due to an AI-related downturn, we could witness significant ramifications within the broader economy, reminiscent of the difficulties seen in the early 2000s.
Conclusion
The dynamic surrounding AI investments presents both opportunities and serious risks. Markets seem poised for a potential correction, with many factors indicating that the current enthusiasm may be unfounded. As the interplay between debt levels and market optimism unfolds, keen observation is necessary to understand the economy’s trajectory and ensure preparedness for possible downturns.
