AI Market Rally Shows Signs of Overheating, Echoing Dot-Com Bubble Concerns
The current surge in the artificial intelligence (AI) market is exhibiting signs of overheating, prompting comparisons to the late 1990s internet boom and bust cycle. Economists are warning investors to tread carefully as valuations become stretched and speculative motives drive market activity.
Economist's Concerns: Parallels to the Dot-Com Era
Joe Brusuelas, chief economist at RSM, has voiced concerns about the sustainability of the AI market rally. In interviews, he noted similarities to the dot-com era, stating, "The internet ... changed the economy and the world forever, but we had to go through a period of adjustment. I think that may be where we're at." He suggests that while AI holds transformative potential, a period of market correction may be inevitable.
Data from the IndexBox Market Intelligence Platform and a study from the MIT Media Lab both suggest a high failure rate for current AI ventures. The MIT study indicates that approximately 95% of AI projects may fail to deliver a measurable financial return.
Risk Management and Market Corrections
Despite broad market enthusiasm, Brusuelas argues that sufficient emphasis hasn't been placed on risk management. He acknowledges the difficulty of timing a market correction, emphasizing that even seemingly overvalued markets can continue to rally for extended periods. However, he cautions that current conditions, including low volatility and rising enthusiasm, suggest a potential shakeout is on the horizon.
"Even if it was a bubble ... these things can go on for very long periods of time," - Joe Brusuelas, RSM Chief Economist
RSM's composite equity index, which measures returns against volatility, has moved one standard deviation above its long-term trend. Historically, such moves have preceded market corrections.
Big Tech Investments and Potential Malinvestment
The market's continued climb is partly attributed to a favorable economic backdrop, with growth nearing its potential, low unemployment (4.3%), and contained inflation. However, the heavy concentration in the tech sector, particularly in artificial intelligence, raises concerns about concentration risk.
Recent large-scale investments, such as Nvidia's (NVDA) potential $100 billion investment in OpenAI (OPAI.PVT), while fueling the rally, also raise questions about sustainability and potential malinvestment. These moves recall the excessive infrastructure spending during the dot-com era.
Cautionary Sentiment
While Brusuelas doesn't believe the market is currently in a bubble, he suggests conditions are ripe for a correction. He also told Yahoo Finance that "Markets are getting a bit frothy right now, and it wouldn't be surprising if we have a healthy correction." He emphasizes the need to ask hard questions about whether such investments are prudent or potentially indicative of a speculative bubble.
