Bubble trouble

If you’ve heard that the AI industry will be transformational, chances are you’ve also heard that the industry is in a bubble.

It’s not just bears warning of an impending market downturn—everyone from Amazon founder Jeff Bezos to the IMF is shouting that equities are due for a serious pullback if the AI bubble bursts. And the fears make sense: Big tech companies are set to splash out roughly $400 billion this year on AI infrastructure in an enormous wager that machine learning will be transformational for the global economy.

The problem isn’t just that the technology’s use case is unproven, it’s that this new AI economy is suspiciously…circular. AI bigwigs have made a habit of handing each other huge sums of cash, making it look like their companies are enjoying massive growth when it’s more like they’re shifting money among themselves.

If the AI boom really does revolutionize the economy and this high stakes game of duck-duck-goose ends well, then so be it. But if the promise of the tech falls short, the house of cards could come crumbling down—hard. One group of analysts recently warned that the AI bubble is currently 17 times the size of the dot-com frenzy, and four times the subprime mortgage bubble of 2008.

Don’t panic just yet

While nobody can say for sure whether or not we’re in a bubble until it actually bursts, some on Wall Street aren’t as pessimistic as others.

Goldman Sachs chief global equity strategist Peter Oppenheimer laid out three reasons he thinks we’re not in a bubble…yet. For one, the hype around AI has been driven by “fundamental growth” as opposed to speculation. He also noted that the companies profiting the most from the AI boom have strong balance sheets. Finally, he said that many of the biggest AI names are incumbents from the Silicon Valley ecosystem, while past bubbles have been marked by new entrants and new money.

But we’re not completely in the clear. “While it appears we are not in a bubble yet, high levels of market concentration and increased competition in the AI space suggest investors should continue to focus on diversification,” he wrote.

Goldman Sachs macro trader Bobby Molavi also argued that investors shouldn’t fight the AI trade, and that they should continue to ride the market momentum while it lasts.

Then again, he didn’t exactly reassure us about how this is all going to end. “Like a night out at 3 am, you never think it’s a good time to go home…But there is always a hangover,” he wrote. “It remains to be seen what AI will leave us—good and bad—but it’s going to leave a mark.”—LB