AI frenzy: Don’t be caught off-guard if the bubble bursts

It is said that history doesn't repeat itself but it often rhymes. If the Bank of England (BoE), IMF, Jamie Dimon and Lloyd Blankfein are to be believed, the US market is composing a verse that sounds eerily like the late 1990s—with AI playing the part once filled by Pets.com and sock puppets.

- SIDDHARTH PAI

On 8 October, the BoE issued a warning that could have come straight from Alan Greenspan's “irrational exuberance” era, cautioning that AI company valuations are dangerously “stretched.” That's central banker speak for: ‘If you squint at the fundamentals, you might eventually see the bottom.’ Meanwhile, JPMorgan’s CEO Dimon, never one to sugarcoat a storm, has indicated that the probability of a bust is probably three times what has been priced in. Naturally, the market ignores this good advice and continues to levitate in a speculative updraft.

But the concern isn’t just about lofty valuations. It's the increasingly creative ways they are being justified. Nvidia's financial relationship with OpenAl—where it invests in Openal, which then uses that money to buy Nvidia’s GPUs—is a classic example of circular revenue. It’s reminiscent of the dotcom era, when startups bought ads from one another and called it ‘growth.’ Today's moves are fancier and involve more silicon.

Oracle's recent earnings added weight to the growing scepticism. Its Al profits fell well below expectations and the stock dropped 7% on 7 October. The reaction suggests that while investors are still enamoured of Al, their tolerance for earning shortfalls is thinning. The music may still be playing, but the crowd may be looking for exits.