Investment commentators are divided on whether the AI bubble is about to burst after shares of big technology companies plunged yesterday (5 November) on the back of Morgan Stanley and Goldman Sachs' CEOs cautioning there could be a market correction ahead.
Reports the trader who inspired the 2015 film The Big Short – Michael Burry – has bet $1.1bn (£840m) on AI-related stocks Nvidia and Palantir tumbling also weighed on US markets. Hedge fund investor Burry became famous for predicting the collapse of the US housing bubble in 2008. Meanwhile equities in Asia saw their biggest dip in seven months yesterday as tech stocks sank.
“Michael Burry’s decision to buy put options and field against NVIDIA and Palantir, albeit in a structure to carefully manage the potential downside as well as the upside, further raises the temperature of the debate over whether AI-related stocks are in the midst of a bubble,” said AJ Bell investment director Russ Mould.
“No-one knows, yet, whether the current capex boom will hit a speed bump to match that of networking equipment in the early 2000s, but it cannot be entirely ruled out as only really NVIDIA currently seems able to turn the AI development boom into profits and cashflow, although Alphabet may be doing the best of the rest,” he added.
Emma Wall, chief investment strategist at Hargreaves Lansdown, said investors’ concerns are valid.
“While a number of AI firms have benefited from strong revenue and profit growth, this has been a narrow and extreme rally,” she said.
“Earlier this year, following both the DeepSeek disruption in January and the tariff tantrum in April, returns seemed to be more broad-based, with the equal weighted S&P 500 outperforming the market cap for periods. But this did not last, and once again high growth, tech-biased, AI-focused businesses have delivered much of the aggregate S&P 500 returns over the past six months.”
Wall suggested investors should use the downturn to “crystallise impressive gains” and diversify their portfolios to include a range of sectors, geographies and asset classes.
“The gold price tipping up is screaming a warning again – a siren that this rally will not last,” she added.
Sean Peche, founder and portfolio manager at Ranmore Fund Management, said the current market dynamics echo Japan’s late-1980s valuation bubble.
“You might argue that the index isn’t trading at 50x accounting earnings like Japan in 1989. Except, given the high capex spend underway, the Mag 7 is currently trading at 58x free cash flow (FCF). Those seven companies have a collective market cap of $22trn and generated $385bn FCF over the past year, far lower than net income of $568bn. Go further and deduct stock-based compensation – a real cost to shareholders – that number rises to 77x FCF,” he said.
“No one knows what the eventual catalyst will be that bursts this bubble, nor when it will happen. But history has repeatedly shown us that the odds of generating attractive real returns over the medium to long term are not on your side when you pay high valuations.”
However, Daniel Casali, chief investment strategist at UK wealth manager Evelyn Partners, says there are “solid reasons to support near-term growth in the AI theme.”
“While some investors may worry about a bubble, the ability for AI firms to boost profitability and fund the AI investment cycle suggests valuations are justified and the rally has further to run,” he said.
“However, the massive energy demands, geopolitical tensions, and uncertainty around vendor financing are risks worth monitoring.”
