Stock markets continue their upward trajectory despite repeated warnings of an artificial intelligence bubble. Investors, hardened by false alarms, remain undeterred, pumping cash into equities even as experts predict a crash.
Market Concentration and the Magnificent Seven
At the heart of the debate is the New York stock market, particularly the S&P 500 and the tech-heavy Nasdaq. The concentration of equity in just seven companies—Amazon, Alphabet (Google), Nvidia, Meta (Facebook), Microsoft, Apple, and Tesla—has raised concerns. These firms, collectively known as the Magnificent Seven, account for a disproportionate share of market value. The 10 largest companies in the S&P 500 now represent about 40% of the index's total market capitalisation, well above the 27% peak during the 1999-2000 tech bubble, according to market data.
Investor appetite appeared to wane at the start of 2025 as some of the seven began borrowing to fund AI investments. This loss of enthusiasm intensified when US President Donald Trump launched strikes in Iran at the end of February. However, the panic was short-lived. The fear of missing out kept most investors in the game. When Trump signalled talks with Iran in late March, the S&P 500 soared again.
Expert Warnings and Historical Precedents
Ludovic Subran, chief investment officer at Allianz, Germany's largest insurer, warned on Thursday that SpaceX's decision to borrow $25bn via a bond sale shortly after raising $86bn from its record-breaking New York listing was a clear sign that markets were entering "bubble territory." His comments followed those of Jeremy Grantham, 87-year-old founder and investment adviser of a large asset manager, who said the AI bubble was about to burst and he was selling up.
Dhaval Joshi, head of global strategy at BCA Research, invoked the "madness of crowds." Citing a study of investment cycles, he explained that markets work well when investors have diverse opinions. "Crowds can go from wisdom to madness when … instead of investors having a range of opinions, their views become correlated. When this happens, either because they synchronise their views or dissenters sit out, the crowd loses the diversity that is the foundation for its accuracy," the study notes. Joshi is watching for an economic recession or aggressive interest rate rises as more historically accurate triggers for a crash.
Why the Bubble Persists
Grantham argues that AI resembles the invention of railways or the internet. Everyone overinvests initially, only to realise later that the invention itself is a utility, like electricity, with limited profit potential beyond services built around it. Google and Meta are primarily advertising businesses. "Will they sell more ads sufficient to justify their share price? Almost certainly not," Grantham said.
Despite these warnings, the AI bubble has further to run. The top 10 companies are generating huge profits, US President Donald Trump is perceived as willing to de-escalate conflicts to keep markets happy, and global savings are abundant, seeking returns. According to Subran, the fear of missing out continues to drive investment, delaying a day of reckoning. "Everyone in financial markets is working very hard to delay the day of reckoning," the article concludes.
