Every couple of decades, investors question how long the stock market can keep climbing. With US markets at historically high levels, some experts warn of an impending crash, but such warnings are often ignored as markets continue to rise.
The current focus is on the concentration of equity in the 'Magnificent Seven' tech giants: Amazon, Alphabet, Nvidia, Meta, Microsoft, Apple and Tesla. Signs of waning investor appetite emerged earlier this year as these firms began borrowing heavily to fund AI investments, but the fear of missing out has kept most investors in the game.
Recent warnings have come from prominent figures. Ludovic Subran, chief investment officer at Allianz, said SpaceX's $25bn bond sale after its record-breaking listing indicated markets were entering 'bubble territory'. Jeremy Grantham, founder of a major asset manager, said the AI bubble was about to burst and he was selling up. Dhaval Joshi of BCA Research called the situation 'the madness of crowds', noting that when investors' views become correlated, market accuracy is lost.
Joshi suggests an economic recession or aggressive interest rate rises could trigger a crash. Grantham compares AI to the railway or internet booms, where overinvestment occurs before the realisation that the invention itself yields little profit. He notes that Google and Meta are advertising businesses unlikely to sell enough ads to justify their share prices.
Disturbingly, the 10 largest companies in the S&P 500 account for about 40% of the index's total market capitalisation, well above the 27% peak during the 1999-2000 tech bubble. However, the AI bubble may have further to run because these top firms are generating huge profits, delaying a day of reckoning.
