As US mega-technology firms prepare to report quarterly earnings this week, the debate over whether artificial intelligence has fueled a new market bubble is intensifying.
Microsoft, Alphabet, Amazon and Meta are all expected to post robust revenue growth for the July through September period, but some market observers warn that the rapid run-up in valuations may be outpacing the sector’s fundamentals.
The four largest cloud providers are projected to spend a combined $400 billion on AI infrastructure this year, according to industry estimates. Yet, the returns for businesses adopting these technologies remain uncertain.
An MIT study earlier this year found that only about one-twentieth of more than 300 AI projects analyzed delivered measurable gains, with most stalling at the pilot stage due to challenges integrating AI into existing workflows and scaling models.
Andrej Karpathy, OpenAI co-founder and former head of AI at Tesla, added to the bearishness with his view that “the models are not there.
"I feel like the industry is making too big of a jump and is trying to pretend like this is amazing, and it’s not. It’s slop,” Karpathy said earlier this month.
The AI-driven rally has added an estimated $6 trillion to the market value of Big Tech since late 2022. Some economists argue that this surge has helped offset broader economic headwinds, but others point to signs of excess reminiscent of the dot-com era.
Circular deals are raising eyebrows, such as Nvidia’s potential $100 billion investment in OpenAI, one of its largest customers, and OpenAI’s $1 trillion in AI compute agreements, including a $300 billion commitment to Oracle. Debt is also apparently playing a larger role in financing this expansion, with Meta recently securing $27 billion in private credit from Blue Owl for its data center buildout.
“When the same companies are both funding and relying on each other, decisions may no longer be based on real demand or performance – but on reinforcing growth expectations,” Ahmed Banafa, engineering professor at San Jose State University, told Reuters. He added that while such deals are not necessarily problematic in isolation, they can increase systemic risk if they become widespread.
Some investors are looking to history for guidance. Professional money managers are reviving strategies from the late 1990s, shifting from hyped-up stocks into potential next-in-line winners, such as software groups, robotics firms and Asian tech companies.
“What we are doing is what worked from 1998 to 2000,” Francesco Sandrini, multi-asset head at Amundi, Europe’s largest asset manager, said in a separate Reuters report. He pointed to signs of “irrational exuberance” in trading activity, but expects the tech enthusiasm to persist for now.
Others are hedging their exposure by diversifying into sectors that could benefit indirectly from AI, such as energy and industrial suppliers, or by building positions in overseas companies.
But the question is whether those evasive maneuvers would be enough, as some skeptics argue that the scale of the current AI bubble dwarfs previous episodes. Julien Garran, a partner at MacroStrategy Partnership, recently described the situation as “the biggest and most dangerous bubble the world has ever seen,” estimating it to be 17 times larger than the dot-com bust and four times the size of the 2008 real-estate bubble.
In an interview with CNN, Garran contended that the AI ecosystem is struggling to generate profits outside of a handful of chipmakers, and that continued growth depends on ongoing infusions of capital.
"The AI ecosystem can’t really sustain itself. You have Nvidia making a ton of money … Anybody else – the data centers, the the LLM developers, the software developers that use LLMs – they’re all heavily loss-making," he said.
For now, Big Tech’s earnings remain strong. Microsoft’s Azure revenue is expected to have risen more than one-third in the latest quarter, outpacing Google Cloud and Amazon Web Services. And as the music continues to play for the largest AI investors, its leaders appear content to sign from the same bullish hymn sheet, recasting signs of a bubble as hints of a healthy correction.
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“This is kind of an industrial bubble as opposed to financial bubbles,” Amazon founder Jeff Bezos declared earlier this month. "[W]hen the dust settles and you see who are the winners – society benefits from those inventions. That’s what is going to happen here too."
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