Financial Institutions Sound Alarm on Potential AI Bubble Burst

Bank of England warns AI stock bubble rivals 2000 dotcom peak

AI bubble talk is in the air, and among the chorus of voices warning of an AI-fueled market bubble (which includes OpenAI CEO Sam Altman and Amazon's Jeff Bezos) is the Bank of England, which warned on Wednesday that global financial markets could face a sharp correction if investor sentiment turns negative on AI. The UK central bank said US stock valuations resemble those seen near the peak of the dotcom bubble on some measures, with AI-focused companies making up an unprecedented portion of market value. In its quarterly report derived from a meeting of its Financial Policy Committee that took place last week, BoE wrote that "the risk of a sharp market correction has increased." Reuters notes that it's the BoE's strongest warning to date about potential AI-driven market declines. The committee, chaired by Governor Andrew Bailey, said spillover risks to Britain's financial system from such a shock were "material." The warning comes as the S&P 500 hit a record high on Tuesday, up 14 percent year to date. The BoE noted in its report that 30 percent of the S&P 500's valuation comes from just five companies at the top, which is the most concentrated the index has been in 50 years. These companies include chipmaker Nvidia, Microsoft, Apple, Amazon, and Facebook parent Meta, all of which have invested substantially in AI development. Share valuations based on past earnings have also reached their highest levels since the dotcom bubble 25 years ago, though the BoE noted they appear less extreme when based on investors' expectations for future profits. "This, when combined with increasing concentration within market indices, leaves equity markets particularly exposed should expectations around the impact of AI become less optimistic," the central bank said. Toil and trouble? The dotcom bubble offers a potentially instructive parallel to our current era. In the late 1990s, investors poured money into Internet companies based on the promise of a transformed economy, seemingly ignoring whether individual businesses had viable paths to profitability. Between 1995 and March 2000, the Nasdaq index rose 600 percent. When sentiment shifted, the correction was severe: the Nasdaq fell 78 percent from its peak, reaching a low point in October 2002. Whether we'll see the same thing or worse if an AI bubble pops is mere speculation at this point. But similarly to the early 2000s, the question about today's market isn't necessarily about the utility of AI tools themselves (the Internet was useful, after all, despite the bubble), but whether the amount of money being poured into the companies that sell them is out of proportion with the potential profits those improvements might bring. We don't have a crystal ball to determine when such a bubble might pop, or even if it is guaranteed to do so, but we'll likely continue to see more warning signs ahead if AI-related deals continue to grow larger and larger over time.

The AI bubble is heading towards a burst but it won't be the end of AI

Economists, bankers and even the boss of OpenAI are warning of a rapidly inflating AI bubble. If and when it bursts, what will happen to the technological breakthroughs of the past few years? The hundreds of billions of dollars being spent on AI seem to have inflated a global financial bubble that's now fit to burst, leaving companies and investors at risk of holding vast debt that cannot be serviced by the meagre revenue brought in by current AI services. But what does that mean for the future of the technology underpinning this financial feeding frenzy? In recent weeks, warnings of a potential AI bubble have come from the International Monetary Fund, the Bank of England, the head of the largest US bank, and even OpenAI boss Sam Altman. "This has not just been a a stock market bubble, it's been an investment bubble, it's been a public policy bubble," says David Edgerton at King's College London. The circular nature of some of the deals between major AI players is also raising eyebrows. For example, Nvidia, which builds the GPU chips that are powering the AI boom, recently invested up to $100 billion into OpenAI so that the company could build a new data centre full of Nvidia's own chips. OpenAI, in turn, has agreed a deal that could see it ultimately take a 10 per cent stake in Nvidia's rival chipmaker, AMD. Concern about the AI bubble bursting is also thrown into sharp relief when you realise the scale: at least $400 billion is being spent annually on data centres, according to Morgan Stanley Wealth Management. And while US GDP rose by 3.8 per cent in the second quarter of the year, Jason Furman at Harvard University estimates that if you removed data centres from the equation it would have barely grown 0.1 per cent over the whole first half of the year. Carl-Benedikt Frey at the University of Oxford says this kind of exuberant deal-making isn't unusual in the history of technology - in fact, it would be unusual if the global economy managed to invest in infrastructure for a new technology at precisely the right pace to meet demand. "It's quite usual that you overbuild: the same thing happened with the railroad boom, the same thing happened with the dot-com bubble," he says. The question is whether the fallout from an AI bubble would just harm the companies involved, or could have wider impacts. Frey points out that many of these hugely expensive data centres are actually being built "off balance sheet". This involves the creation of new companies backed by external investors or banks that build and own the assets, taking on both the risks and potential rewards. As a result, we don't know enough about who is exposed to this risk. A data centre could be financed by a dozen technology billionaires, or it could be high-street banks - and if their losses are large enough, then a banking crisis could send shockwaves throughout the wider economy. "That's not to say that there's an imminent financial crisis, but that it's a bit opaque. And when things are opaque, there's usually some risk," says Frey. Benjamin Arold at the University of Cambridge says the giveaway is the ratio of profits to company valuations, which indicates how disconnected public opinion is from the actual money businesses bring in. He says these figures for technology firms today are a red flag. "The last time is was this low was 25 years ago, and if you remember, 25 years ago we had the dot-com bubble," says Arold. "It's possible that it goes well, but I would not bet my money on it." James Poskett at the University of Warwick, UK, believes we are heading for a correction in the AI industry that may spell the end for many companies, but he says this certainly isn't the end for the technology itself. "It's important not to confuse that with the idea that the technology is flawed or going to go away," says Poskett. "There might be an AI bust, but that doesn't mean we're not gonna have AI." Just as the consolidation of numerous railway companies after a bust left us with a rail network, and the collapse of technology firms in the dot-com bust left us a legacy of extensive fibre optic networks, we'll be left with useful technology, says Poskett. For consumers, the AI bubble popping is likely to mean a bit less choice, maybe paying a bit more for access, maybe seeing a slower pace of updates. It could force us to face the reality that using a vastly expensive tool like GPT-5 to write an email is like using a sledgehammer to crack a nut, and that the true cost of using it had previously been hidden by the frenzied AI arms race. "At the minute, there's a lot of free lunch, but at some point these companies have got to make a profit," says Poskett.

Former Intel CEO Pat Gelsinger confirms the industry is in an AI bubble, but that a pop could be several years away -- 'We're displacing all of the internet and the service provider industry as we think about it today'

Pat Gelsinger says we're already in an AI bubble, but says it could be several years before anything bad happens. The former Intel CEO was asked during an interview on CNBC if we're in an AI bubble, stating, "There's a lot of leverage in the system, there's a lot of cash, but then there's a whole bunch of other folks who are trying to build these data centers. Whether there's the energy component side of it, or whether you think about the real estate component, I mean, there's just a whole lot of things happening at one time." "Are we in an AI bubble? Of course, we are. We are hyped, we're accelerating, we're putting enormous leverage into the system," Gelsinger answered. "With that said, I don't see it ending for several years. I do think we have an industry shift to AI. As Jensen (Huang) talked about, and I agree with this, you know that businesses are yet to really start materially benefiting from [it]. We're displacing all of the internet and the service provider industry as we think about it today -- we have a long way to go." Despite the disruption that AI has put on some industries, Gelsinger believes that we still have quite a way to go before we see the AI bubble burst. Continuing improvements in semiconductor efficiency would allow the industry to go further before running into trouble, the former CEO added, stating some changes will start materializing later in the decade. As such, he believes that nothing could change in the state of play for several years, despite radical improvements to AI he acknowledged had transpired in the last year alone. Many experts are starting to get worried about the AI bubble, especially as companies are investing billions into the technology without seeing real returns yet. Even big institutions like the Bank of England and the International Monetary Fund are worried about it, saying we're already halfway into a crash that could erase trillions in value. Still, tech companies continue investing and building massive data centers, like OpenAI's planned gigawatt facility in India. These projects aren't just costing money and energy -- they're also affecting global memory and storage supply, leading to a price crunch for just about everything that needs them. If the AI bubble bursts, a lot of industries will be affected. While those working in the semiconductor and AI space will be hit the hardest, financial institutions would also be gravely affected -- especially those that have heavily invested in companies like Nvidia and OpenAI. And while the average person might think they're safe because they do not own stocks in these companies, their banks, pension funds, and other financial instruments likely are, causing widespread chaos if and when this happens.

Measuring risk in the AI financing boom

The artificial intelligence boom is entering a new and riskier phase. Global capital expenditure on chips, data centres and cloud infrastructure has, so far, been driven by hyperscalers, funded largely through their vast internal cash balances. But the projected scale of computing power needed for generative AI is now prompting a shift towards more leveraged, opaque and circular financing structures, which raises the economic stakes riding on the technology's success. Between now and 2029, global spending on data centres is forecast to hit almost $3tn, according to Morgan Stanley. Big Tech groups will remain major spenders, but cash flows from their advertising and cloud computing businesses can only stretch so far. Many are increasingly looking to public and private credit sources to support further expansion. In August, Meta raised $29bn -- including $26bn of debt -- from private capital investors to fund centres in Ohio and Louisiana. Although large tech groups still enjoy strong credit ratings, debt is being channelled into projects for non-investment-grade borrowers, such as CoreWeave, ChatGPT developer OpenAI and smaller AI start-ups. Finance is also being secured from other companies within the tech supply chain, creating a dense and interdependent web of exposures. This year OpenAI has announced over $1tn worth of deals for computing power with Nvidia, Oracle, CoreWeave, AMD, and, on Monday, Broadcom. Some agreements have involved complex circular financing arrangements. The shift in financing broadens the potential economic and financial fallout should generative AI fail to live up to its promise. Until now, most concern has centred on the stock market. Last week, the IMF and Bank of England both warned that tech valuations were approaching dotcom-era extremes, heightening the danger of a sharp correction in global equities. A sudden reversal would hit investment funds, pensions and retail portfolios. But the growing reliance on debt, particularly from lower-quality issuers, now also leaves banks and the highly leveraged non-bank sector exposed to any defaults. Incestuous bilateral funding deals only amplify the risk of domino effects. The pressure on generative AI to show it can generate the revenue needed to justify today's investment -- and pay back creditors -- will intensify. ChatGPT recently reached 800mn weekly active users, and is widely used by consumers in their everyday lives. That said, broader business adoption will take time, and the longer the anticipated boost to economy-wide productivity fails to show, the greater the risk of a pullback in funding, and defaults. There are other risks too: chip innovation might mean data centres become obsolete faster than anticipated, and poor access to cheap electricity could render them unviable. Even if the AI build-out proves to be overzealous, history suggests the excess could leave behind useful infrastructure, much like the railway boom of the 19th century or the fibre networks laid during the dotcom bubble. A glut of cheap compute power could then support the next wave of growth and innovation. Either way, the data centre investment surge is no longer just a bet on productivity, but increasingly a test for financial stability as well. With credit, capital and confidence set to be more entwined, a stumble could shake far more than tech valuations. Corporate discipline, investor scrutiny, and regulatory vigilance will now be more important in ensuring the AI boom builds more than it breaks.

Leading financial institutions are worried about a looming AI bubble

Both the (IMF) and the are warning of an AI bubble that could burst sooner than later, citing soaring valuations and stock prices. Speaking at the Milken Institute in Washington DC, Kristalina Georgieva, managing director of the IMF, that "uncertainty is the new normal and it is here to stay" and that we should all "buckle up." In discussing financial conditions, she said that "fired up by optimism about the productivity-enhancing potential of AI, global equity prices are surging." The Bank of England, for its part, has that "the risk of a sharp market correction has increased," and that "equity market valuations appear stretched, particularly for technology companies focused on artificial intelligence (AI)." It also notes the increasingly common concern that AI might not deliver all that it has promised. A record of a recent Financial Policy Committee meeting at the Bank of England reads, "downside factors included disappointing AI capability/adoption progress or increased competition, which could drive a re-evaluation of currently high expected future earnings." The AI craze has been in full swing since the in 2022 and its since then. The chatbot kicked off a flurry of investment, such as in 2023. And, of course, the biggest tech companies followed OpenAI's lead with products like Google's Gemini, Microsoft Copilot and Apple Intelligence. Since then, the ChatGPT maker has inked hundreds of billions of dollars in purchasing and investment agreements with the likes of and in the race for AI dominance. Competitors like , whose AI will replace half of all white-collar jobs within five years, have found the backing of other tech giants like and . Integrations for AI tools , and the proliferation of the technology keeps entering new spaces, . There's no telling how everything will play out, but in the meantime AI can help us shop for shoes by .

Bank of England warns of 'sharp market correction' if AI bubble bursts

Bank of England, the Royal Exchange and the statue of the Duke of Wellington in the City of London on 19th February 2025 in London, United Kingdom. The Bank of England on Wednesday warned that the risk of a "sharp market correction" has increased, noting that stock market valuations appear stretched, particularly for artificial intelligence-focused tech firms. The central bank becomes the latest in a long list of banks and investors to weigh in on whether an AI bubble is forming as markets tick into the fourth quarter. Heightened geopolitical tensions, fragmented trade and financial markets and pressures on sovereign debt markets play into the risk, the Bank of England said in a record of its latest meeting minutes. "A crystallisation of such global risks could have a material impact on the UK as an open economy and global financial centre," it said. Equity market valuations stood at near all-time highs, the Bank of England said, thanks in part to strong second-quarter earnings by U.S. tech firms. "The market share of the top 5 members of the S&P 500, at close to 30%, was higher than at any point in the past 50 years," it said, noting that AI-focused tech company valuations appear particularly stretched. "This, when combined with increasing concentration within market indices, leaves equity markets particularly exposed should expectations around the impact of AI become less optimistic," the meeting minutes said. With such high expectations of future earnings growth, any pullback on AI-related bets could lead to ripple effects, it added. Investors are closely watching AI-related stocks as earning season gets underway, with some strategists confident that tech company valuations are being driven by sound fundamentals. Goldman Sachs also remained cautiously optimistic in its latest note, believing a bubble has not yet formed but heeded a warning to investors to "diversify." Federal Reserve Chair Jerome Powell, however, warned of "fairly highly valued" assets on Tuesday, though he didn't explicitly refer to technology firms. The Bank of England further warned that "downside factors included disappointing AI capability/adoption progress or increased competition, which could drive a re-evaluation of currently high expected future earnings."

Is the AI Conveyor Belt of Capital About to Stop?

The American economy is little more than a big bet on AI. Morgan Stanley investor Ruchir Sharma recently noted that money poured into AI investments now accounts for about 40% of the United States’ GDP growth in 2025, and AI companies are responsible for 80% of growth in American stocks. So how bad is it that the most recent major deal among AI giants, agreements that have driven up stock prices dramatically, look like a snake eating its own tail? In recent months, Nvidia announced that it would invest $100 billion into OpenAI, OpenAI announced that it would pay $300 billion to Oracle for computing power, and Oracle announced it would buy $40 billion worth of chips from Nvidia. It doesn’t take a flow chart to get the feeling that these firms are just moving money around between each other. But surely that’s not happeningâ€|right? It’s a little harder to get assurances of that than you might think. Many of these agreements are, on their face, mutually beneficial. If everything is on the level, while these deals might be circular, they should be moving everything forward. Rishi Jaluria, an analyst at RBC Capital Markets, told Gizmodo that deals like these could result in a “less capacity-constrained world,†which would allow for faster development of models that could produce higher returns on investment. “The better models we have, the more we can realize a lot of these AI use cases that are on hold just because the technology isn’t powerful enough yet to handle it,†he said. “If that happens, and that can generate real [return on investment] for customers â€| that results in real cost savings, potentially new revenue generation opportunities, and that creates net benefits from a GDP perspective.†So as long as we keep having AI breakthroughs and these companies figure out how to monetize their products, everything should be fine. On the off chance that doesn’t happen, though? “If that doesn't happen, if there is no real enterprise AI adoption, then it's all round-tripping,†Jaluria said. Round-tripping, generally speaking, refers to the unethical and typically illegal practice of making trades or transactions to artificially prop up a particular asset or company, making it look like it’s more valuable and in demand than it actually is. In this case, it would be tech companies that are trying to make it appear like they are more valuable than they actually are by announcing big deals with each other that move the stock price. So what might suggest whether this money is actually accomplishing anything other than serving as hot air in a rapidly inflating bubble? Jaluria said he’s watching for faster developments of models, advancements in performance, and overall AI adoption. “If this leads to a step function change in the way enterprise is adopting and utilizing AI, that creates a benefit,†he said. Whether that is happening currently or not is kind of in the eye of the beholder. OpenAI has certainly shown advancements in its technology. The release of its Sora 2 video generation model has unleashed a fresh hell upon the world, used to generate significant amounts of copyright violations and misinformation. But the latest version of the company’s flagship model, GPT-5, underwhelmed and failed to live up to expectations when it was released in August. Adoption rates of the technology are also a bit of a Rorschach test. The company boasts that 10% of the world is using ChatGPT, and nearly 80% of the business world says that it’s looking into how to utilize the technology. But the early adopters aren’t finding much utility. According to a survey from the Massachusetts Institute of Technology, 95% of companies that have tried to integrate generative AI tools into their operations have produced zero return on investment. Where these investments are generating a return is in the stock market. Which, frankly, does not quell concerns about these firms simply boosting one another’s bottom line. Take Oracle, for example. Last month, the cloud provider had a rough quarter by all traditional indicators. It missed on both its revenue and earnings projections, and its net income was flat year-over-year. And yet, the stock price soared. The reason: the company's plump list of remaining performance obligationsâ€"financial agreements that will provide revenue that have not yet been fulfilled. There, the company showed a massive amount of growth, a 359% increase from the year prior, with a projected $455 billion coming in. That money is not real yet. Nor is the growth the company has promised, claiming that its Oracle Cloud Infrastructure revenue would grow from under $20 billion to nearly $150 billion before the start of the 2030s. But all of it was sufficient for investors to drive up Oracle's share price enough to slingshot CEO Larry Ellison into the top spot on the world's richest person list, briefly leapfrogging Elon Musk. Most of this promised revenue will come from OpenAI, which made a commitment to purchase $300 billion worth of computing power from the company over five years. The clock on that contract doesn't start until 2027, but assuming it actually happens, it would be one of the largest cloud computing deals in history. It's also one of the most unlikely, just based on where the companies involved currently stand. In order to provide the compute that it has promised to OpenAI, Oracle will reportedly need to generate 4.5 gigawatts of power capacity, more than two Hoover Dams' worth of power. On the other side of the deal, OpenAI will have to pay about $60 billion per year to fit the bill for the agreement. It currently generates about $10 billion in revenue, which, statistically speaking, is less than $60 billion. You can see a similar circular shape to OpenAI’s recent deal with Nvidia rival AMD, too. The exact details of the agreement weren’t reported, but chipmaker AMD expects to generate tens of billions of dollars over the next half-decade as it sells its AI chips to OpenAI. As part of the agreement, OpenAI gets a swath of shares in AMD, with options to buy up to 10% of the company. Lucky for OpenAI, there’s really no better time to get your hands on some AMD shares than right before it announces a big AI-related deal. The company’s stock price surged by about 35% following the announcement. With those two most recent deals on the books, OpenAI has agreed to more than $1 trillion worth of computing deals so far this year. That’s a lot for any company to spend, but it’s especially a lot for a still-private company that reports just $10 billion in projected revenue through 2025. Even by its most recent funding rounds, the company as a whole is currently valued at about $500 billion. Most of those deals have contingencies attached. For instance, Nvidia’s investment in OpenAI isn’t actually $100 billion, but an initial $10 billion for one gigawatt of data center capacity with the potential for $100 billion if 10 gigawatts are ultimately achieved. But the stock prices and valuations certainly seem to treat these deals as if they are set in stone. And OpenAI seems to be operating that way, too. The company claims that it’ll more than 10x its revenue in the next few years, and projects it’ll hit $129 billion annually by 2029. That type of potentially inflated revenue figure is the kind of thing that makes some people think of the Dot Com bubble of the early 2000s, where we saw companies like Commerce One receive a $21 billion valuation despite barely having any revenue. But Peter Atwater, Adjunct Professor of Economics at William and Mary and President of consulting firm Financial Insyghts, sees a different reflection in the AI bubble: the housing market collapse. “What we saw at the top of the mortgage market was all of these conveyor belts of capital, money flowing from one party to another party to another party. And what you started to see was that there were multiple points of relationship so that any participant in the system was then dependent on every other conveyor belt in the system working simultaneously to keep the system going,†he told Gizmodo. “In many ways, we're seeing the same developing web of capital flows across the AI space.†This creates some obvious problems. The circular deals that, in theory, are wheels moving the whole thing forward all have to keep turning. If any of them stop, the whole thing stops, because they are all so interconnected that no failure is truly isolated. Atwater said that the types of major, metric-contingent deals that have been dominating headlines in the AI space aren’t all that different from some of what was happening in the mortgage industry back in 2007, where some of the financial commitments required mortgages to meet certain conditions. “In the frenzy of a bubble, everyone overcommits. The purpose of overcommitting is to stake a claim in what you believe will be an intensely scarce commodity in the future. So you have buyers overcommit and you have sellers agreeing to overprovide as a result,†he explained. “What we find over and over is that commitments are among the first obligations to be cut off once conditions change, once confidence begins to fall.†Right now, there’s a stomach for those commitments. That isn’t guaranteed to be there in the future if all of these promised returns on investment don’t materialize. Atwater said that the market requires credit markets being willing to continue to extend massive sums of money to cover the agreements made, equity markets that value these transactions at “an extraordinary multiple,†and suppliers capable of delivering the promised products. There’s no guarantee that all of those factors will hold. The math is already pretty tricky. As tech commentator Ed Zitron has pointed out, major firms like Microsoft, Meta, Tesla, Amazon, and Google have invested about $560 billion in AI infrastructure over the last two years. They’ve brought in a combined $35 billion in AI-related revenue. OpenAI’s commitments are even bigger, with returns that are arguably even smaller. The company’s development and expansion of its services will rely in no small part on massive data center projects, which will require the same amount of energy to operate as New York City and San Diego combinedâ€"energy that currently isn’t even available. And, once again, there is no guarantee that the end product, once all of that energy is spent and data centers are built, will actually generate revenue. “Ultimately, if you do not have a consumer for the product, there will be no AI space because these companies can't continue to do this for nothing. Listening to a lot of the calls in the last couple of weeks, there's a clear open question as to how these companies are going to make money at this,†Atwater said. For the moment, everyone is seeing green, and hope springs eternal. As long as that is the case, no one will ask where the revenue is coming from. “Right now, the AI sector is operating in a forever mindset. They are acting as if they have a very long period of time under which they can figure this out and make money,†Atwater said. “As long as confidence is high, this entire ecosystem can offer fantasy. When confidence falls, they're going to be expected to deliver real-term performance in a very short time frame.†Unfortunately, should that happen, it won’t just be these companies that bear the brunt of the failure. “You have to look at this as a larger ecosystem. To talk about AI today, it means we have to talk about the credit market, we have to talk about the credit market. Wall Street and AI are a single beast,†Atwater said, warning that a very small number of firms currently have a major grasp on the whole of the American economy. Lots of investors are piling into the AI space, fearful of missing out on a market that seems like it can only go up. But few of them are looking at why those valuations and stock prices keep climbing, showing little curiosity as to what might happen if all of this money is just getting shifted around, artificially inflating the actual value of the companies they are betting on. “â€~Why?’,†Atwater said, "is the last question asked in a bull market."

Bank of England Warns of an AI Bubble Burst

The central bank of the United Kingdom is worried about an AI bubble burst. "On a number of measures, equity market valuations appear stretched, particularly for technology companies focused on Artificial Intelligence (AI)," the bank's financial policy committee said, according to a record of its latest meeting. "This, when combined with increasing concentration within market indices, leaves equity markets particularly exposed should expectations around the impact of AI become less optimistic." The Bank also warned that stock market price valuations were comparable to the peak of the dot-com bubble, and the market share of the top five members of the S&P 500 was at its highest concentration in 50 years. Those five companies are, unsurprisingly, AI-focused tech giants Nvidia, Microsoft, Apple, Amazon, and Meta. All five of these companies are spending eye-watering figures on AI, and the stock market loves it. Microsoft became the second company to ever hit a $4 trillion market valuation earlier this year after posting its largest ever quarterly expenditure forecast. Nvidia, on the other hand, is the first and only company in the world to hit a $4.5 trillion market cap. "Material bottlenecks to AI progress â€" from power, data, or commodity supply chains â€" as well as conceptual breakthroughs which change the anticipated AI infrastructure requirements for the development and utilisation of powerful AI models could also harm valuations, including for companies whose revenue expectations are derived from high levels of anticipated AI infrastructure investment," the bank said. Fed researchers issued a similar warning earlier this year. While that alert did not identify an immediate risk of an AI bubble, the researchers pointed out that a risk that comes with building expensive infrastructure too quickly for anticipated demand was that demand might not grow as expected. In that case, it could lead to "disastrous consequences," the Fed warned, likening it to the railroad over-expansion of the 1800s that led to an economic depression towards the turn of the century. These top AI companies with high revenue expectations are also heavily reliant on each other financially, increasing worries of a cascade effect if a bubble bursts. AI companies ink multibillion-dollar deals with each other over and over again, injecting more money into the system and ballooning stock valuations with each deal. While that's happening, some experts are admitting overvaluation. Apollo Global Management's chief economist Torsten Slok said in July that the AI bubble of today is actually worse than the 1999 dot-com bubble. OpenAI CEO Sam Altman also admitted in August that he thinks investors are "over-excited about AI." The main downside risks of AI overvaluation, according to the bank, also include disappointing AI capability or adoption progress. A recent MIT report found that despite the major push to adopt AI in the corporate world, fewer than one in ten AI pilot programs actually generated real revenue gains. The report spooked investors enough that AI stocks immediately slid following the headlines in August. Last month, the Census Bureau showed that the rate of AI adoption by large companies had been declining slightly. Nonetheless, executives keep assuring investors that AI demand is scaling rapidly as the technology finds its way into more and more areas of life. AI computing demand is up "substantially" in the past six months, according to Nvidia CEO Jensen Huang's comments on Wednesday. But if the tech giants are wrong and the Bank of England's risk scenario does end up being the case, the bank warned that a sudden, sharp correction could occur, "adversely affecting the cost and availability of finance for households and businesses." The U.S. has reason to be afraid of this. According to recent reports, the AI spending frenzy is not just propping up the American stock market, but it's also lifting the real economy. According to Harvard economist James Furman's calculations, U.S. GDP growth in the first half of the year was almost entirely driven by investments made in data centers and other information-processing technology.

Alarms bells ring as Bank of England warns of 'sharp market correction' when AI bubble bursts

If this bursts, devastating affects could ripple through the economy Mutterings continue to swirl about "an AI bubble" - Jeff Bezos has admitted it, Sam Altman has admitted it, and now, financial institutions are beginning to sound the alarm over the potential catastrophic crash the economy faces if the bubble bursts. The Bank of England's financial policy committee warned the 'risk of sharp market correction' has increased, and that investors have not fully accounted for these risks. "On a number of measures, equity market valuations appear stretched, particularly for technology companies focused on artificial intelligence. This ... leaves equity markets particularly exposed should expectations around the impact of AI become less optimistic," The Guardian reports. Huge circular deals between Nvidia, AMD, OpenAI, and Oracle have seen billions of dollars committed between the firms to fund chips, infrastructure, and AI models - which has sparked serious concern; "Today's valuations are heading toward levels we saw during the bullishness about the internet 25 years ago... If a sharp correction were to occur, tighter financial conditions could drag down world growth, expose vulnerabilities, and make life especially tough for developing countries," warned the head of the IMF, Kristalina Georgieva . Some research has even claimed AI-related capital expenditures have surpassed the consumer in the US as the primary driver of economic growth in the first half of 2025. "AI-related stocks have accounted for 75% of S&P 500 returns, 80% of earnings growth and 90% of capital spending growth since ChatGPT launched in November 2022," said Michael Cembalest, chairman of JP Morgan Asset Management Strategy. That's a hell of a lot of spending considering research recently revealed that almost all (95%) of generative AI pilots are failing. If investors don't start to see profit soon, the stock market valuations could suffer. Real use-cases of AI have been faltering too, with Deloitte forced to refund the Australian government after it used AI to produce an error-strewn report that included false citations, fake footnotes, and made-up court quotes. Although AI spending looks set to keep increasing for the foreseeable future, some reports indicate AI use is actually now declining in large organizations - which could signal the beginning of the end for the AI boom.

What could burst the AI bubble?

Some of the world's biggest tech firms have soared in value over the last year. As AI evolves at pace, there are hopes that it will improve lives in ways that people could never have imagined a decade ago -- in sectors as diverse as health care, employment and scientific discovery. OpenAI is now worth US$500 billion (£373 billion), compared with US$157 billion last October. Another firm, Anthropic, has almost trebled its valuation. But the Bank of England has now warned of a possible rapid "correction" due to its concerns about these staggering valuation rises. The question is whether these values are realistic -- or based on hype, excitement and unfounded optimism for the potential of AI. Put simply, is AI's value today a product of what AI will do in future or what people hope it may do? Ultimately, we will only really know if it's a bubble if it bursts -- though the warning signs are evident today. With hindsight, many things that happen in a bubble may sound exceedingly optimistic. If you take many headlines and replace the word AI with the word computers it often sounds a lot more naive. But, predicting the path of technological change is hard. Back in 2000, the Daily Mail declared the internet could be a passing fad. Just a few months earlier the dotcom boom had peaked. A burst bubble may not change the end of the journey. The internet was not a passing fad. However, bubbles are extremely disruptive and affect people in very real ways. Stocks fall, pensions suffer, unemployment rises and investment is wasted. Real potential is crowded out in the hype and mania to focus all investment in a small number of stocks and firms. Right now, we have the first sign of a bubble -- a rapid rise in valuations. If these correct and fall we will have a bubble. If these valuations continue to rise we could be seeing a new sustained market that is focused on the technology of the future. Of course, it might be that these valuations plateau. What happens then depends on whether people have invested in the belief that prices will always rise. Consider a situation where people believe -- as the Bank of England does -- that AI firms' valuations may be "stretched." It's helpful to consider what these valuations are based on. Investment is simply a bet that AI increases profitability for the firms involved. These massive valuations are bets that AI will hugely increase future profitability. In some cases, these are bets that AI will improve in capabilities towards some kind of "artificial superintelligence" that can do everything a human can do -- or more. This could raise the living standards of everyone on Earth. Leading computer scientist Stuart Russell estimates the value of that at US$14 quadrillion -- investors are buying a claim on that outcome too. If investors begin to fear that AI profits won't materialize, then they will try to get their money back. This realization can appear quite suddenly and can be prompted by seemingly minor events. It doesn't require a big needle to pop a bubble. A US article published in March 2000 warned that internet companies were fast running out of money. This caused many people to rethink their investments At this stage of the bubble, investment excitement had spread to everyday investors. These regular people balanced their fear of missing out with a fear that they were investing in something new that they didn't know much about. For many, an article in a popular magazine suggesting they may have made a mistake tipped the scales towards caution. They began to sell their dotcom stocks. In search of profit It may come as a surprise to some that, despite its increasing valuations, OpenAI does not yet make a profit. It may require ten times more revenue to do so. A US$500 billion valuation is quite something for a company that reportedly lost US$7.8 billion in the first half of this year. Some of this value appears to flow from a new deal between OpenAI and Nvidia where Nvidia will invest in OpenAI and OpenAI will buy Nvidia chips. This circular financing keeps everything afloat for now, but at some point investors will need to see returns. AI firms more generally do not appear to be profitable at the moment. Investors are not putting their money into today's losses -- they are betting on an AI future. It is of course perfectly feasible that AI firms will develop business models to increase their profitability. OpenAI is exploring advertising options and allowing chatbots to recommend products. Using AI to deliver these messages is a viable option, though they will have to avoid the tricks and manipulations associated with online platforms, such as when hotel websites announce that rooms are about to sell out. We believe that AI can increase the power of these manipulations and we wonder how persuasive chatbots may be in their recommendations. However, the big four -- Meta, Alphabet, Microsoft and Amazon -- are this year spending the equivalent of the GDP of Portugal on AI infrastructure. This is not investment in new targeted ads, it is investment in an AI future. The bubble will burst if and when this future is in doubt. This article is republished from The Conversation under a Creative Commons license. Read the original article.

Bank of England Warns of Impending AI Disaster

The Bank of England has sounded the alarm, warning of an intensifying risk of a "sudden correction" in global financial markets driven by the spending frenzy on artificial intelligence. As Reuters points out, it's the institution's clearest warning yet that we could be on the precipice of an AI disaster. "The risk of a sharp market correction has increased," said the Bank of England's financial policy committee during a Wednesday meeting, as quoted by Reuters, warning that "equity market valuations appear stretched, particularly for technology companies focused on artificial intelligence." "Should expectations around the impact of AI become less optimistic," markets could be left "particularly exposed," the bank cautioned. Concerns over an AI bubble bursting have grown lately, with analysts recently finding that it's 17 times the size of the dotcom-era bubble and four times bigger than the 2008 financial crisis. Analysts -- and even OpenAI CEO Sam Altman himself -- have acknowledged that AI companies are struggling to make enough money to cover their exorbitant expenses, concerns that drove a major tech selloff earlier this year. And whether they'll ever be able to produce enough revenue is a looming question. A startling report by researchers at MIT spooked investors in August, finding that only a measly five percent of AI pilot programs help businesses succeed at "rapid revenue acceleration," with the vast majority falling flat. Yet according to recent estimates, generative AI now accounts for roughly 40 percent of the United States' gross domestic product. In other words, if the AI spending boom falls apart, it could take down the entire economy with it. Fund manager and former Morgan Stanley investor Ruchir Sharma warned in a recent piece for the Financial Times that the US economy has turned into "one big bet on AI." "AI companies have accounted for 80 per cent of the gains in US stocks so far in 2025," he wrote. "That is helping to fund and drive US growth, as the AI-driven stock market draws in money from all over the world, and feeds a boom in consumer spending by the rich." Put simply, only the extremely wealthy appear to be benefiting from all of this. "The top ten percent of earners account for half of consumer spending," Sharma added, "the highest share on record since the data begins." "The AI trade is beginning to resemble one of the great speculative manias of market history," Selwood Asset Management chief investment officer of equities Karim Moussalem wrote in a LinkedIn post last week. "For me, there is no denying that we are in the midst of a bubble, and a total retail-driven frenzy." Meanwhile, the White House has stoked ongoing fears of a major correction, with president Donald Trump repeatedly urging the US central bank to slash interest rates in an effort to make interest payments on US debt more affordable. "A sudden or significant change in perceptions of Federal Reserve credibility could result in a sharp repricing of US dollar assets, including in US sovereign debt markets, with the potential for increased volatility, risk premia and global spillovers," the Bank of England warned, as quoted by Reuters. However, tech leaders are mostly soaring above the anxiety about an AI bubble, or even flipping those concerns around to frame the possibility as a positive: during an event last week, Amazon founder Jeff Bezos claimed that if such a bubble were to burst, "it can even be good, because when the dust settles and you see who are the winners, societies benefits from those inventions." "This is real, the benefits to society from AI are going to be gigantic," Bezos added.

Most US Growth Now Rides on AI -- And Economists Suspect a Bubble - Decrypt

Elon Musk's xAI raised $20 billion for a new data-center, with bulls and bears debating whether AI is a bubble or not. What happens when artificial intelligence becomes both the economy's primary engine and its potential Achilles' heel? We may be about to find out. Harvard economist Jason Furman recently said that AI investments accounted for nearly 92% of U.S. GDP growth in the first half of 2025. Basically, the entire American economy put its eggs in one algorithmic basket. And that basket might be ready to break. Today, the Bank of England warned that market valuations for AI companies are increasingly irrational. "On a number of measures, equity market valuations appear stretched, particularly for technology companies focused on Artificial Intelligence (AI)," analysts for the bank wrote. "This, when combined with increasing concentration within market indices, leaves equity markets particularly exposed should expectations around the impact of AI become less optimistic." If you needed more evidence of market exuberance, Elon Musk's xAI is currently raising a cool $20 billion, apparently earmarked for what amounts to the world's most expensive Nvidia shopping spree. The company, valued at $200 billion (up from $6 billion just months ago), plans to use the funds for its "Colossus 2" data center. In a delicious bit of circular logic, Nvidia itself is reportedly investing up to $2 billion in the deal -- essentially paying for priority access to its own chips. Ruchir Sharma, chair of Rockefeller International, told Fortune that in a way, "America has become one big bet on AI," and warned that "AI better deliver for the U.S., or its economy and markets will lose the one leg they are now standing on." So which is it -- a transformative revolution or the second coming of the dot-com crash? There are arguments for any of those positions, with reputable doomers and accelerationists debating about it every single day. The bulls have compelling ammunition. Unlike the vapor-ware companies of 1999, today's AI giants are printing money. The "Magnificent Seven" tech companies are proving to be hugely profitable. Nvidia's stock has spiked 1,700% in the last two years. OpenAI is targeting $12.7 billion in revenue for 2025. Microsoft, Google, Meta, AMD, Oracle, and all the big companies involved in AI are also exceeding expectations. The infrastructure being built is also tangible: data centers humming with activity, power generation facilities (including those quirky nuclear deals), and software that's already transforming how businesses operate. Almost 90% of developers are using AI today, with generative AI adoption more than doubling within a year. UBS Chief Investment Officer wrote in an analysis that this is just a big, yet healthy momentum. "There is little evidence of a market bubble at present, and we would look to benefit from AI-driven momentum in the stock market with a broadly diversified portfolio," he said. Financial Analyst Steven Fiorillo also argues that, despite what doomers preach, this bullish market is backed by results, not hype. "I have a newsflash for every bear, A.I. is not a bubble," he posted on X last week. "At the end of the day, MSFT, AMZN, GOOGL, and META generated $493.31 billion in cash from operations, allocated $291.35 billion in CapEx and generated $201.96 billion in FCF (free cash flow) in the TTM (trailing twelve months). These numbers indicate that the dot com era and the A.I. era are very different and there is no A.I. bubble to be found." That view is also shared by Bank of America analysts, who argue that volatility signals that markets are healthy and there are not enough signs of a market bubble in place. But the bears have history on their side, and history has a nasty habit of rhyming. The Bank of England's comparison to dot-com valuations is based on hard metrics. The top ten S&P 500 companies now command more than one third of the index's total valuation, a concentration not seen in half a century. When so much wealth is tied to so few companies, a stumble becomes a systemic risk. However, according to AI researchers at MIT, 95% of organizations are failing at their Generative AI investments. Are we witnessing genuine transformation or collective delusion? The practical bottlenecks -- power shortages, chip supply constraints, the sheer physics of cooling all those servers -- suggest that even if AI is revolutionary, the revolution might move slower than stock prices imply. Tech CEOs themselves are increasingly vocal about bubble concerns, even as they continue to raise astronomical sums. "Are we in a phase where investors as a whole are overexcited about AI? my opinion is yes" OpenAI CEO Sam Altman said in August. "When bubbles happen, smart people get overexcited about a kernel of truth." Amazon's Jeff Bezos, is also convinced: "This is a kind of industrial bubble," he said Friday at Italian Tech Week in Turin. "There will be a reset, there will be a check at some point, there will be a drawdown." The truth likely inhabits that murky middle ground. AI is undoubtedly transformative -- any technology that can account for 92% of economic growth isn't just hype. But the question as always with the next big thing is how much is indeed hype.

Ex-Intel CEO Pat Gelsinger says 'of course' we're in an AI bubble but it won't end 'for several years'

'We're hyped, we're accelerating, we're putting enormous leverage into the system.' Ex-Intel CEO Pat Gelsinger spoke to CNBC earlier this week, ruminating on a variety of topics, including AI. When asked whether he thought the tech industry was in the middle of an AI bubble, he responded: "Of course. Of course we are. We're hyped, we're accelerating, we're putting enormous leverage into the system. "That said, I don't see it ending for several years. I do think we have an industry shift to AI, as Jensen has talked about and I agree with this, businesses are yet to really start materially benefitting from it. We're displacing all of the internet and the service provider industries as we think about it today. We have a long way to go." Fears around AI being an economic bubble, like the one that caused the dot-com crash in 2000 or the global financial crisis in 2008, appear to be at the front of many industry minds of late. OpenAI's Sam Altman recently commented that he thought "someone [was] going to lose a phenomenal amount of money" due to overinflated AI company valuations, mere weeks before announcing another megabucks deal with Broadcom -- while Jamie Dimon, the head of JP Morgan recently said that "the level of uncertainty in most peoples' minds should be higher" regarding the stock market as a whole. And then there's the former leader of the UBS commodities strategy team and market analyst, Julien Garran, who recently stated that the AI bubble is "17 times the size" of the one behind the aforementioned dot-com crash. Oh, and one more for good measure: The International Monetary Fund and the Bank of England have recently warned of a potential "sudden correction" in markets as a result of overinflated AI company valuations. All of which is downright cheering, isn't it? And for those of you feeling a sense of schadenfreude towards AI companies potentially receiving their economic comeuppance, know this -- market sectors don't exist in a vacuum. Both the dot-com disaster and the 2008 financial crisis were primarily caused by individual markets plunging in value as their respective bubbles burst -- and both significantly damaged the worldwide economy as a result. For Gelsinger's part, he doesn't appear to think AI companies are due to receive an eventual market correction for a while to come. He went on to extoll the potential benefits of Snowcap, a company of which he is a board member, which is planning to develop AI chips for "extreme performance and energy efficiency", which Gelsinger seems to think might help AI be a more profitable enterprise in the years to come. "To me there's a set of technologies on the horizon, some of which we're driving, like our Snowcap, where we're promising to be 100X better in power performance", says Gelsiner. "Meaning a gigawatt datacenter, I can do it in 10 megawatts and deliver the same AI performance. Not just Snowcap, but a whole range of disruptive technologies, and I think they start materialising in the latter part of the decade." "I do think, in that sense, nothing is changing this path for several years." Cool. In the meantime, however, the AI bubble debate rages on. Certainly, the takeaway at this point seems to be that it's a "when, not if" situation, and what it looks like when it eventually arrives, no one really knows. However, looking at previous bubbles, I can't help but feel we're going to be in for some tough economic times ahead when this one eventually pops.

AI is booming -- and the bust could be even bigger

In the 1960s, IBM embarked on what Fortune called the $5 billion gamble. It was a bet-the-company investment on a scale nobody had seen before. The payoff was the legendary System/360 mainframes, which revolutionized computing and set the stage for two decades of IBM dominance. That $5 billion would be roughly the equivalent of $50 billion today, but even that princely sum is dwarfed by the $364 billion that tech giants are expected to invest in artificial intelligence this year. And the spending won't stop there. McKinsey projects that building AI data centers alone could demand $5.2 trillion by 2030. Today, the AI investment boom is probably the single biggest factor propping up the US economy. However, there is cause for concern. Throughout our history, great technological advances have led to overinvestment, the crowding out of traditional industries, and, eventually, a collapse triggering economic upheaval. Indicators suggest that's where we're headed now.

New reports add to concerns about potential AI bubble - SiliconANGLE

A series of reports published this week has raised new concerns about the potential risks of the artificial intelligence boom. The Bank of England warned today that the likelihood of a "sharp market correction" has increased. One of the reasons is that "on a number of measures, equity market valuations appear stretched, particularly for technology companies focused on artificial intelligence," the bank's financial policy committee stated. The statement follows a pair of Tuesday reports by Bloomberg and NBC News that scrutinized the circular business relationships between major AI industry players. The reports focused on the sizable investments that Nvidia Corp. and Advanced Micro Devices Inc. have made in language model startups. In some cases, those startups are using the capital to buy Nvidia and AMD graphics cards. It's believed that xAI Holdings Corp. could soon join the list of AI developers involved in such circular deals. Bloomberg reported on Tuesday that the Elon Musk-backed OpenAI rival plans to raise up to $2 billion in funding from Nvidia. Earlier this year, xAI began building a supercomputer called Colossus 2 that is expected to house 550,000 Nvidia chips. If the AI spending boom is a bubble, the associated financial risks could affect not only language model developers and their chip suppliers but also the broader economy. On Tuesday, NBC News cited research firm Oxford Economics as saying that an AI market crash could lead to "a sharp correction in tech stocks, with negative knock-ons for the real economy." The new reports don't mark the first time that concerns about the AI industry's financial risks have come to the fore. The impact of AI spending on the broader economy was the focus of an X post series published last month by economist Jason Furman. In one post, the former director of the White House's Council of Economic Advisers estimated that AI spending accounted for 92% of U.S. GDP growth in the first half of 2025. "Absent the AI boom we would probably have lower interest rates & electricity prices, thus some additional growth in other sectors," Furman added. "In very rough terms that could maybe make up about half of what we got from the AI boom." Earlier, an MIT report about companies' struggles to realize a return on generative AI pilot projects caused a 1.2% drop in the Nasdaq. It's believed the selloff was also influenced by an interview in which OpenAI Chief Executive Officer Sam Altman stated that the AI market could be in a bubble. Several other prominent tech industry figures echoed that sentiment. OpenAI reportedly expects to become cash-flow positive by the end the decade. Nvidia, in turn, told Bloomberg today that it "does not require any of the companies we invest in to use Nvidia technology."

Ex-Intel CEO CEO Pat Gelsinger says 'Of course' the tech industry is in an AI bubble

TL;DR: The current AI boom is seen by experts like ex-Intel CEO Pat Gelsinger as a significant industry shift with vast investments and high valuations, resembling a potential bubble similar to past tech crashes. Despite hype, widespread economic benefits are still emerging, and the AI expansion is expected to continue for several years. On one hand, you've got companies and CEOs talking about the current AI boom and era of computing, ushering in a new type of industry, factories, culture, and employment. On the other hand, you've got people and ex-CEOs talking about the current AI boom and fixation on creating data centers that draw more power than a town as the next bubble. Similar to the dot-com bubble and crash of 2000, or the financial crisis of 2008, the AI bubble will also burst one day. In a recent interview with CNBC, ex-Intel CEO Pat Gelsinger falls into the "AI bubble" camp, but notes that the current AI race and expansion by the tech industry and companies everywhere won't end "for several years." "Of course we are," Pat Gelsinger responded when asked if we're currently in an AI bubble. "We're hyped, we're accelerating, we're putting enormous leverage into the system. That said, I don't see it ending for several years." Although you won't find many dismissing the benefits or game-changing applications that generative AI and AI agents are bringing to the table, the primary concern surrounding the whole AI bubble scenario is economic. It is related to the sheer amount of money being invested and the eye-opening valuations of some AI companies. Pat Gelsinger, like NVIDIA CEO Jensen Huang, believes that the industry is shifting and the future is AI, but the material or financial benefits have yet to materialize. "I do think we have an industry shift to AI, as Jensen has talked about, and I agree with this," Pat Gelsinger adds. "Businesses are yet to really start materially benefitting from it. We're displacing all of the internet and the service provider industries as we think about it today. We have a long way to go." Essentially, as we're seeing an unprecedented AI-centric transformation in all industries that leverage technology, Pat Gelsinger believes it will take several years for the AI bubble to burst.

Is there an AI bubble? Financial institutions sound a warning

LONDON -- LONDON (AP) -- Lingering doubts about the economic promise of artificial intelligence technology are starting to get the attention of financial institutions that raised warning flags this week about an AI investment bubble. Officials at the Bank of England on Wednesday flagged the growing risk that tech stock prices pumped up by the AI boom could burst. "The risk of a sharp market correction has increased," the U.K. central bank said. The head of the International Monetary Fund raised a similar alarm hours after the Bank of England's report. Global stock prices have been surging, fired up by "optimism about the productivity-enhancing potential of AI," IMF Managing Director Kristalina Georgieva said. But financial conditions could "turn abruptly," she warned in a speech ahead of the organization's annual meeting next week in Washington. "Bubbles obviously are never very easy to identify, but we can see there are a few potential symptoms of a bubble in the current situation," said Adam Slater, lead economist at Oxford Economics. Those symptoms include rapid growth in tech stock prices, the fact that tech stocks now comprise about 40% of the S&P 500, market valuations that appear "stretched" beyond their worth and "a general sense of extreme optimism in terms of the underlying technology, despite the enormous uncertainties around what this technology might ultimately yield," Slater said. The most optimistic projections about the fruits of generative AI products foresee a transformation of the economy, leading to annual productivity gains that Slater says have not been seen since the reconstruction of Europe after World War II. At the lower end, economist Daron Acemoglu of the Massachusetts Institute of Technology has predicted a "nontrivial but modest" U.S. productivity gain of just 0.7% over a decade. "You've got this incredibly wide range of possibilities," Slater said. "Nobody really knows where it's going to land." Investors have closely watched a series of intertwined deals over recent months between top AI developers such as OpenAI, maker of ChatGPT, and the companies building the costly computer chips and data centers needed to power these AI products. OpenAI doesn't turn a profit but the privately held San Francisco firm is now the world's most valuable startup, with a market valuation of $500 billion. It recently signed major deals with chipmaker Nvidia, the world's most valuable publicly traded company, and its rival AMD. The Bank of England didn't name any specific companies but said that on "a number of measures, equity market valuations appear stretched, particularly for technology companies focused on Artificial Intelligence." The report said stock market valuations are "comparable to the peak" of the 2000 dotcom bubble, which then deflated and led to a recession. With tech stocks accounting for an increasingly large share of benchmark stock indexes, stock markets are "particularly exposed should expectations around the impact of AI become less optimistic." The bank outlined so-called downside risks, including shortages of electricity, data or chips that could slow AI progress, or technological changes that could lessen the need for the type of AI infrastructure currently being built around the world. The IMF's Georgieva said current stock valuations "are heading toward levels we saw during the bullishness about the internet 25 years ago. If a sharp correction were to occur, tighter financial conditions could drag down world growth," she said. Tech company bosses are downplaying the doomsayers. The current AI boom is an industrial, rather than financial or banking, bubble and will be beneficial for society even if it bursts, Amazon founder Jeff Bezos said. "The ones that are industrial are not nearly as bad. It could even be good because when the dust settles and you see who are the winners, society benefits from those inventions," Bezos said at a recent tech conference in Italy. He compared it to a previous biotech bubble in the 1990s that resulted in new life-saving drugs. The excitement around AI is drawing in a huge wave of money to fund new business ideas, but it's also clouding investors' judgment, Bezos said. "Every company gets funded, the good ideas and the bad ideas. And investors have a hard time in the middle of this excitement distinguishing between the good and bad ideas and so that's also probably happening today," he said. On a tour last month of a Texas data center, OpenAI CEO Sam Altman predicted people will "make some dumb capital allocations" and there will be short-term ups and downs of overinvestment and underinvestment. But he added that "over the arc that we have to plan over, we are confident that this technology will drive a new wave of unprecedented economic growth," along with scientific breakthroughs, improvements to quality of life and "new ways to express creativity." Nvidia CEO Jensen Huang acknowledged in a CNBC interview on Wednesday that OpenAI doesn't yet have the money to buy its chips, but "they're going to have to raise that money" through revenue, which "is growing exponentially," along with equity or debt. Huang said he also believes a transition has happened as leading AI developers are moving from chatbots that operated "basically at a loss" because the models "weren't useful enough" to one in which the AI systems are capable of higher-level reasoning. "It's doing research before it answers a question," he said. "It goes on the web and studies other PDFs and websites, it can now use tools, generate information for you, and it creates responses that are really useful." AI companies have spent more than a year pitching the transformative potential of "AI agents" that can go beyond a chatbot's capability by being able to access a person's computer and do coding and other work tasks on their behalf. But as the initial hype fades, Forrester analyst Sudha Maheshwari said businesses looking to buy these AI tools are taking a closer look at whether they're getting enough return on their investments. "Every bubble inevitably bursts, and in 2026, AI will lose its sheen, trading its tiara for a hard hat," she wrote in a report Wednesday. -- -- O'Brien reported from Providence, Rhode Island and Abilene, Texas.

When will the AI bubble burst? As OpenAI signs yet another megabucks deal with Broadcom, can anyone make sense of the trillions of dollars involved?

A hundred billion here, a hundred billion there, pretty soon you're talking about real money. So, OpenAI has signed yet another megabucks deal, this time with Broadcom and involving 10 gigawatts of what's described as OpenAI designed "custom AI accelerators." From a technological perspective, the interesting bit is that the hardware is OpenAI designed. "OpenAI will design the accelerators and systems, which will be developed and deployed in partnership with Broadcom. By designing its own chips and systems, OpenAI can embed what it's learned from developing frontier models and products directly into the hardware, unlocking new levels of capability and intelligence," the announcement says. That implies OpenAI wants to at least try to do its own thing with AI hardware rather than be entirely at the mercy of Nvidia and, to a lesser extent, AMD. But arguably the bigger intrigue involves the financial implications of yet another big hardware deal from OpenAI. Lest you have forgotten, in recent weeks OpenAI has announced a $300 billion deal for cloud computing services with Oracle, a complex deal with Nvidia worth at least $100 billion, followed by yet another deal with Nvidia's arch rival, AMD, that's worth at minimum tens of billions of dollars. As the saying goes, a hundred billion here, a hundred billion there, pretty soon you're talking about real money. In fact, you're talking about so much money, that attention has now turned to the idea of an AI bubble and when it's going to burst. One thing everyone seems to agree on is that there is a bubble. Even OpenAI's CEO Sam Altman says, "people will over-invest and lose money," even if he also thinks, "over the arc that we have to plan over, we are confident that this technology will drive a new wave of unprecedented economic growth." But when the AI bubble will burst and what the impact will be, that's another question. Many observers are taking previous bubbles as examples to prove that, actually, a burst AI bubble won't be so bad. No less a figure than his royal Amazoness, Jeff Bezos, has explained that just because there's an AI bubble and just because it's bound to burst, that doesn't actually mean it's bad news. He uses the example of the 1990s biotech bubble that burst, leaving scores of companies as smouldering wrecks but also a legacy of several new lifesaving drugs. The other obvious example is the dotcom boom of the late '90s and '00s and the associated $500 billion fibre optic roll out. As Bloomberg explains, 200 companies went pop when that bubble burst. But on those ashes the modern internet was built. So, the argument here is that, yes, there's an AI bubble, yes it's going to burst, yes a lot of companies will go to the wall and incalculable quantities of investment capital will go up in smoke. But despite all that, AI will still be a revolution, just as the internet was still a revolution regardless of the dotcom crash. Indeed, some observers including Bezos argue that the real revolution won't be the likes of OpenAI and Nvidia, in other words, the companies whose entire being is all about AI technology, "AI first" companies in Bezos' words. It will be the fact that AI will impact literally every company in the world. According to Bezos, "AI is real and it is going to change every industry." He describes AI as a, "horizontal enabling layer" that's going to make quality and productivity improve at literally every company on the planet. Of course, that's the end game. In the meantime, there's the minor matter of all the money flying around in these megabucks deals. By some estimates, OpenAI's plans just with Oracle, Nvidia and AMD will cost more than $1 trillion by the end of the decade and it's not clear where the money is coming from. As linked above, Bloomberg has a handy diagram that tracks what's increasingly seen as worryingly circular series of deals with money going, to take just one example, from Nvidia to OpenAI, with the latter in turn then purchasing hardware from the former. It's not hard to see from deals like that how the whole house of cards could come tumbling down. The only real question, it increasingly seems, isn't if the AI bubble will burst, but what the impact will be when it does. As with other "industrial" bubbles, it won't necessarily be all bad news. There will be an awful, awful lot of installed AI hardware and it will be useful for something. What, exactly, that use will be and what the economic fallout of such huge titans of today's stock markets losing a ton of cash and value will be remains to be seen.

Why experts are worried about an AI bubble in the stock market

A growing chorus of voices is warning there could be an artificial intelligence (AI) bubble, as companies whose fortunes are closely tied to the technology see their valuations skyrocket. High-profile figures, from OpenAI CEO Sam Altman to Amazon founder Jeff Bezos, have suggested in recent months that investors have become overexcited about AI, as companies bet big on the technology with multibillion-dollar investments. This has been compounded by concerns about the increasingly circular nature of AI spending, as the likes of Nvidia, OpenAI and AMD announce new deals that seem to feed themselves. "The question is -- are we in an AI bubble?" said James Angel, an associate professor at Georgetown University's McDonough School of Business. "You never really know until afterwards whether today's prices were justified by the future cash flows of these companies or whether investors were overly exuberant." Since the advent of OpenAI's ChatGPT in late 2022, AI has become a major draw for investors. Nvidia, once a relatively obscure company focused on producing chips for video games, has become the most valuable company in the world. In July, the chipmaker became the first public company to surpass a market capitalization of $4 trillion, as its chips remain the lifeblood of the AI boom. It currently sits at a massive $4.5 trillion. Tech giants, like Microsoft, Apple, Amazon, Google and Meta, have also seen expansive growth over the past three years as they seek to cash in on the AI craze, promising vast investments in AI. Other firms have also felt the power of investors' excitement in AI. Oracle saw its stock surge 40 percent on a single day in September, after projecting massive revenue from several multibillion-dollar cloud computing contracts. These huge gains have increasingly spurred concerns that stock prices are getting away from their underlying value, the dynamic that results in a bubble. "When bubbles happen, smart people get overexcited about a kernel of truth," OpenAI's Altman told reporters in August, according to The Verge. "Are we in a phase where investors as a whole are overexcited about AI? My opinion is yes," he said. "Is AI the most important thing to happen in a very long time? My opinion is also yes." Bezos offered a similar assessment earlier this month, suggesting that this excitement might be clouding investors' judgment. "[The] thing that happens when people get very excited, as they are today about artificial intelligence for example, is every experiment gets funded, every company gets funded," he said, adding, "Investors have a hard time in the middle of this excitement distinguishing between the good ideas and the bad ideas." Bubble fears have continued to grow, particularly as observers question the seemingly circular nature of AI financing in the wake of a series of high-profile deals between key players. Nvidia announced last month that it planned to invest $100 billion in OpenAI. The ChatGPT maker, in turn, intends to build 10 gigawatts' worth of data centers on the company's systems, which Nvidia CEO Jensen Huang suggested was equivalent to between 4 million and 5 million chips. Just two weeks later, OpenAI announced it would purchase 6 gigawatts worth of chips from AMD. As part of the deal, the AI firm will have the option to take up to a 10 percent stake in the chipmaker. The deals have raised concerns about vendor financing, in which a seller helps a buyer finance a purchase of its own product. This was a feature of the dot-com bubble in the late 1990s -- one of several reasons the current AI boom has drawn comparisons to the boom and bust that accompanied the rise of the internet age. Bank of America analyst Vivek Arya acknowledged in a research note last week that the deals "bring back some unpleasant memories" from the period. However, he argued that concerns about vendor financing are "highly overstated," suggesting such deals will likely represent a small portion of the expansive spending in AI over the coming years. Goldman Sachs analysts similarly noted that there are "elements of investor behaviour and market pricing currently that rhyme with previous bubbles," pointing to vendor financing, rising valuations, increasing market concentration and heightened spending. But they aren't ready to declare an AI bubble quite yet. The rise in stock prices has so far been accompanied by solid underlying growth rather than pure speculation, while spending has largely relied on free cash flow instead of debt, the Goldman analysts noted. In the case of a bubble, these differences could also make markets more forgiving, Angel suggested. "When you have a story stock, everything is based on the story, and the moment a crack appears in the story, the markets can respond violently," he told The Hill. "But when you have a company that has a track record ... even if there's a slight glitch, I suspect the markets may be a bit more forgiving, and that it'll take longer for them to say, all right, where's the cash flow?" he added. Some have also sought to distinguish the potential AI bubble from others. Bezos suggested there is an "industrial bubble," which could "even be good" for society, given the inventions it produces. San Francisco Federal Reserve president Mary Daly seemed to be of a similar mind in a recent interview with Axios, emphasizing that not all bubbles are financial. "Research and economics call it more like a good bubble, where you're getting a ton of investment," she said. "Even if the investors don't get all the returns that the early enthusiasts think when they invest, it doesn't leave us with nothing. It leaves us with something productive," Daly added. However, the Bank of England in a meeting earlier this month warned of the potential for a "sharp market correction," noting that markets are "particularly exposed should expectations around the impact of AI become less optimistic." Even amid all the excitement and fears surrounding AI, Callie Cox, chief market strategist at Ritholtz Wealth Management, emphasized that the technology's impact has yet to flow into the economy in a "significant way." Its impact is not really showing up in jobs or productivity data, she noted. "Right now, a lot of hopes and dreams are being priced into the stock market around AI," Cox said. "And we just don't have a lot of proof that all of these assumptions will be true. So, AI is a much bigger driver for the stock market than it is for the economy." While a dip in the stock market could have some impact on the economy, Cox underscored that the job market is much more relevant. "Overall, you want to watch the job market if you are trying to form an opinion about the economy," she added. "And right now, AI doesn't have much impact on the job market."

Is There an AI Bubble? Financial Institutions Sound a Warning

LONDON (AP) -- Lingering doubts about the economic promise of artificial intelligence technology are starting to get the attention of financial institutions that raised warning flags this week about an AI investment bubble. Officials at the Bank of England on Wednesday flagged the growing risk that tech stock prices pumped up by the AI boom could burst. "The risk of a sharp market correction has increased," the U.K. central bank said. The head of the International Monetary Fund raised a similar alarm hours after the Bank of England's report. Global stock prices have been surging, fired up by "optimism about the productivity-enhancing potential of AI," IMF Managing Director Kristalina Georgieva said. But financial conditions could "turn abruptly," she warned in a speech ahead of the organization's annual meeting next week in Washington. Is there an AI bubble? "Bubbles obviously are never very easy to identify, but we can see there are a few potential symptoms of a bubble in the current situation," said Adam Slater, lead economist at Oxford Economics. Those symptoms include rapid growth in tech stock prices, the fact that tech stocks now comprise about 40% of the S&P 500, market valuations that appear "stretched" beyond their worth and "a general sense of extreme optimism in terms of the underlying technology, despite the enormous uncertainties around what this technology might ultimately yield," Slater said. The most optimistic projections about the fruits of generative AI products foresee a transformation of the economy, leading to annual productivity gains that Slater says have not been seen since the reconstruction of Europe after World War II. At the lower end, economist Daron Acemoglu of the Massachusetts Institute of Technology has predicted a "nontrivial but modest" U.S. productivity gain of just 0.7% over a decade. "You've got this incredibly wide range of possibilities," Slater said. "Nobody really knows where it's going to land." Doubts about the worth of top AI companies Investors have closely watched a series of intertwined deals over recent months between top AI developers such as OpenAI, maker of ChatGPT, and the companies building the costly computer chips and data centers needed to power these AI products. OpenAI doesn't turn a profit but the privately held San Francisco firm is now the world's most valuable startup, with a market valuation of $500 billion. It recently signed major deals with chipmaker Nvidia, the world's most valuable publicly traded company, and its rival AMD. The Bank of England didn't name any specific companies but said that on "a number of measures, equity market valuations appear stretched, particularly for technology companies focused on Artificial Intelligence." The report said stock market valuations are "comparable to the peak" of the 2000 dotcom bubble, which then deflated and led to a recession. With tech stocks accounting for an increasingly large share of benchmark stock indexes, stock markets are "particularly exposed should expectations around the impact of AI become less optimistic." The bank outlined so-called downside risks, including shortages of electricity, data or chips that could slow AI progress, or technological changes that could lessen the need for the type of AI infrastructure currently being built around the world. The IMF's Georgieva said current stock valuations "are heading toward levels we saw during the bullishness about the internet 25 years ago. If a sharp correction were to occur, tighter financial conditions could drag down world growth," she said. What the tech bosses say Tech company bosses are downplaying the doomsayers. The current AI boom is an industrial, rather than financial or banking, bubble and will be beneficial for society even if it bursts, Amazon founder Jeff Bezos said. "The ones that are industrial are not nearly as bad. It could even be good because when the dust settles and you see who are the winners, society benefits from those inventions," Bezos said at a recent tech conference in Italy. He compared it to a previous biotech bubble in the 1990s that resulted in new life-saving drugs. The excitement around AI is drawing in a huge wave of money to fund new business ideas, but it's also clouding investors' judgment, Bezos said. "Every company gets funded, the good ideas and the bad ideas. And investors have a hard time in the middle of this excitement distinguishing between the good and bad ideas and so that's also probably happening today," he said. On a tour last month of a Texas data center, OpenAI CEO Sam Altman predicted people will "make some dumb capital allocations" and there will be short-term ups and downs of overinvestment and underinvestment. But he added that "over the arc that we have to plan over, we are confident that this technology will drive a new wave of unprecedented economic growth," along with scientific breakthroughs, improvements to quality of life and "new ways to express creativity." Awaiting the promise of more useful AI agents Nvidia CEO Jensen Huang acknowledged in a CNBC interview on Wednesday that OpenAI doesn't yet have the money to buy its chips, but "they're going to have to raise that money" through revenue, which "is growing exponentially," along with equity or debt. Huang said he also believes a transition has happened as leading AI developers are moving from chatbots that operated "basically at a loss" because the models "weren't useful enough" to one in which the AI systems are capable of higher-level reasoning. "It's doing research before it answers a question," he said. "It goes on the web and studies other PDFs and websites, it can now use tools, generate information for you, and it creates responses that are really useful." AI companies have spent more than a year pitching the transformative potential of "AI agents" that can go beyond a chatbot's capability by being able to access a person's computer and do work tasks on their behalf. But as the initial hype fades, Forrester analyst Sudha Maheshwari said businesses looking to buy these AI tools are taking a closer look at whether they're getting enough return on their investments. "Every bubble inevitably bursts, and in 2026, AI will lose its sheen, trading its tiara for a hard hat," she wrote in a report Wednesday. -- -- O'Brien reported from Providence, Rhode Island and Abilene, Texas.

World's top banker says the AI bubble will burst, and shedloads of money 'will probably be lost'

"AI in total will pay off... cars in total paid off, and TVs in total paid off, but most people involved in them didn't do well." Jamie Dimon, the head of JP Morgan and widely regarded as the world's top banker, has given a wide-ranging interview to the BBC. Metal Gear fans rejoice: The full thing can be found in the Big Boss Interview (yes, that's really what they call it), and one of the topics Dimon is pressed on is AI and the enormous investment and cross-holdings (for example, Microsoft's investment in OpenAI) across this nascent field. Dimon firstly says he's "far more worried than others" about a serious market correction, also known as a crash, which "could be six months, could be two years" away. He broadly reckons that the US stock markets are overheated, and says "the level of uncertainty in most peoples' minds should be higher." This isn't all about AI: Dimon cites "a lot of things out there" like the geopolitical situation, fiscal spending and remilitarisation, a topic he seems quite keen on. "All these things cause a lot of issues that we don't know how to answer," he said. "So I say the level of uncertainty should be higher in most people's minds than what I would call normal." Dimon says his internal sense of the probabilities would be "a higher probability than the market and maybe others... if the market says 10%, I'd say 30%." So this all sounds fantastic! Earlier this week PCG reported on an investment note from one Julien Garran, former leader of UBS's commodities strategy team, in which he claims AI is no mere bubble, but a bubble 17 times larger than the dotcom bubble and four times that of the sub-prime bubble behind the 2008 global crash. Dimon says of the field's many cross-investments that "AI is a little bit different, there are some justifications for vendor finance and things like that" before going on a bizarre tangent about where he'd like to see more investment: "People talk about stockpiling things like crypto, I always say we should be stockpiling bullets, guns and bombs. The world's a much more dangerous place, and I'd rather have safety than not." Dimon goes on to talk about the impossibility of predicting market crashes precisely before cheerily reciting the "'74 crash, the '82 crash, '90, the Internet bubble you mentioned where I think a trillion dollars was lost at one point... But things came out of it that were hugely beneficial." Dimon's here talking about the big tech companies that survived the dotcom crash and now dominate the global landscape: "hugely beneficial" is obviously a bit of a judgment call. "There's all that hype out there, you take AI, there's all that money going into it," says Dimon in this context. "The way I look at it is AI is real, AI in total will pay off. Just like cars in total paid off, and TVs in total paid off, but most people involved in them didn't do well." "Most people involved" losing out just doesn't seem good, does it? Pressed by the BBC's Simon Jack on whether investors were going to lose big on AI, he admits some of the money will "probably be lost." So that's just great. Dimon's warning comes just a day after the Bank of England warned that "the risk of a sharp market correction has increased" with direct reference to an AI-triggered market slump, adding that the risk to Britain's financial system was "material." It pointed out that 30% of the US S&P 500's valuation consisted of the five largest companies, the greatest concentration in 50 years. "This, when combined with increasing concentration within market indices, leaves markets particularly exposed should expectations around the impact of AI become less optimistic," said the BoE. A year or two ago, it was podcasters and tech journalists speculating that the AI gold rush might be getting out of hand. Now it's some of the world's top financial minds looking at this and going "hmmm, maybe there's a problem here." The sheer scale of the bet on this technology might make it the biggest gamble in history. And if it doesn't work out, it sure sounds like (almost) everybody loses.

AI gold rush turning to panic? Experts warn the bubble could soon explode

AI investment is growing fast, but experts warn of a possible bubble. Companies like OpenAI, Nvidia, and AMD are making huge deals and building large AI data centres. While some see risks of overvalued companies and financial problems, others believe AI infrastructure will create new products and opportunities. The future of AI funding and its impact on the economy is uncertain. At OpenAI's DevDay this week, OpenAI CEO Sam Altman answered questions from reporters, which tech bosses rarely do. Mr Altman said, "I know it's tempting to write the bubble story. In fact, there are many parts of AI that I think are kind of bubbly right now." In Silicon Valley, there is growing debate about whether AI companies are overvalued, with some fearing that rapid value rises are due to "financial engineering". Mr Altman admitted some investors may make mistakes and some start-ups could walk away with crazy money, but added, "there's something real happening here." Many experts are not convinced about AI's stability. Warnings about an AI bubble have come from the Bank of England, IMF, and JPMorgan's Jamie Dimon, who told the BBC, "the level of uncertainty should be higher in most people's minds." In Silicon Valley, concerns are rising. AI entrepreneur Jerry Kaplan, who has lived through four bubbles, said the stakes now are much higher than during the dot-com boom. Kaplan warned, "When [the bubble] breaks, it's going to be really bad, and not just for people in AI. It's going to drag down the rest of the economy." Prof Anat Admati from Stanford said predicting a bubble is very hard, "It is very hard to time a bubble. And you can't say with certainty you were in one until after the bubble has burst." Data shows AI-related companies accounted for 80% of US stock market gains this year, and global AI spending may reach $1.5tn by 2025. OpenAI is involved in complex multi-billion-dollar deals. Last month, OpenAI made a $100bn deal with Nvidia to build AI data centres with Nvidia chips. OpenAI also announced plans to buy billions of dollars of equipment from AMD, potentially making OpenAI one of AMD's largest shareholders. Microsoft and Oracle also have massive deals with OpenAI. Oracle alone has a $300bn deal. OpenAI's Stargate project in Abilene, Texas, funded by Oracle and SoftBank, keeps growing. Nvidia has a stake in AI startup CoreWeave, which supplies OpenAI's infrastructure needs. Experts in Silicon Valley say these complex financing deals may confuse people about real AI demand. Some critics call these arrangements "circular financing" or "vendor financing", where companies invest in or lend to their own customers to boost sales. Mr Altman said, "Yes, the investment loans are unprecedented," but added, "it's also unprecedented for companies to be growing revenue this fast." Despite revenue growth, OpenAI has never turned a profit. Some experts compare the situation to Nortel, a Canadian telecom firm that borrowed to boost customer demand. Nvidia CEO Jensen Huang defended the OpenAI deal, "They can use it to do anything they like. There's no exclusivity. Our primary goal is just really to support them and help them grow - and grow the ecosystem." Jerry Kaplan notes warning signs, companies announce big initiatives they can't fully fund, and retail investors rush in. The surge in AMD stock may indicate investors chasing ChatGPT profits. Real-world AI infrastructure like huge data centres in remote places is being built rapidly. Kaplan warns, "We're creating a new man-made ecological disaster...with no one left to hold accountable because the builders and investors will be long gone." Some in Silicon Valley see hope, Jeff Boudier from Hugging Face said overinvestment may still enable new products and experiences, like the internet emerging after telecom over-investment. Many still believe in AI's potential to transform society. Experts worry whether funding for top AI companies will run out. Rihard Jarc said, "Nvidia looks like the last lender or investor. Who else has the capacity right now to invest $100 billion in another company?" Q1. Is there an AI bubble right now? Experts warn parts of AI may be overvalued, but no one can say for sure until a crash happens. Q2. Why are companies like OpenAI making huge deals with Nvidia and AMD? They are investing in AI infrastructure and tech to grow fast, even though it involves complex financing deals.

BoE issues warning over potential AI bubble

This content has been selected, created and edited by the Finextra editorial team based upon its relevance and interest to our community. The latest report from the central bank's Financial Policy Committee, warns that valuations of stocks "appear stretched, particularly for technology comp[anies focused on AI". This leaves equity markets particularly exposed should expectations around the impact of AI become less optimistic, according to the bank The report, which did not mention any companies by name, draws comparisons with the dotcom bubble at the turn of the millennium which saw a sharp drop in the stock price of a host of online and ecommerce companies, including a number of fintechs. AI companies have become increasingly prominent in the financial services market. Generative AI developer OpenAI recently acquired Roi, a personal finance app, suggesting that AI could make further inroads into the financial advisory market. Meanwhile some of the largest companies associated with AI have seen their valuations rise significantly in recent months. The report highlights a number of additional factors that have added uncertainty to the global economy, such as geopoltical tension, fragmentation of global trade and presasure on sovereign bond markets. "Uncertainty around the global risk environment increases the risk that markets have not fully priced in possible adverse outcomes, and a sudden correction could occur should any of these risks crystallise," states the bank. "A sharp correction could interact with vulnerabilities in the system of market-based finance, adversely affecting the cost and availability of finance for households and businesses."

Is there an AI bubble? Financial institutions sound a warning - The Korea Times

LONDON (AP) -- Lingering doubts about the economic promise of artificial intelligence technology are starting to get the attention of financial institutions that raised warning flags this week about an AI investment bubble. Officials at the Bank of England on Wednesday flagged the growing risk that tech stock prices pumped up by the AI boom could burst. "The risk of a sharp market correction has increased," the U.K. central bank said. The head of the International Monetary Fund raised a similar alarm hours after the Bank of England's report. Global stock prices have been surging, fired up by "optimism about the productivity-enhancing potential of AI," IMF Managing Director Kristalina Georgieva said. But financial conditions could "turn abruptly," she warned in a speech ahead of the organization's annual meeting next week in Washington. "Bubbles obviously are never very easy to identify, but we can see there are a few potential symptoms of a bubble in the current situation," said Adam Slater, lead economist at Oxford Economics. Those symptoms include rapid growth in tech stock prices, the fact that tech stocks now comprise about 40% of the S&P 500, market valuations that appear "stretched" beyond their worth and "a general sense of extreme optimism in terms of the underlying technology, despite the enormous uncertainties around what this technology might ultimately yield," Slater said. The most optimistic projections about the fruits of generative AI products foresee a transformation of the economy, leading to annual productivity gains that Slater says have not been seen since the reconstruction of Europe after World War II. At the lower end, economist Daron Acemoglu of the Massachusetts Institute of Technology has predicted a "nontrivial but modest" U.S. productivity gain of just 0.7% over a decade. "You've got this incredibly wide range of possibilities," Slater said. "Nobody really knows where it's going to land." Investors have closely watched a series of intertwined deals over recent months between top AI developers such as OpenAI, maker of ChatGPT, and the companies building the costly computer chips and data centers needed to power these AI products. OpenAI doesn't turn a profit but the privately held San Francisco firm is now the world's most valuable startup, with a market valuation of $500 billion. It recently signed major deals with chipmaker Nvidia, the world's most valuable publicly traded company, and its rival AMD. The Bank of England didn't name any specific companies but said that on "a number of measures, equity market valuations appear stretched, particularly for technology companies focused on Artificial Intelligence." The report said stock market valuations are "comparable to the peak" of the 2000 dotcom bubble, which then deflated and led to a recession. With tech stocks accounting for an increasingly large share of benchmark stock indexes, stock markets are "particularly exposed should expectations around the impact of AI become less optimistic." The bank outlined so-called downside risks, including shortages of electricity, data or chips that could slow AI progress, or technological changes that could lessen the need for the type of AI infrastructure currently being built around the world. The IMF's Georgieva said current stock valuations "are heading toward levels we saw during the bullishness about the internet 25 years ago. If a sharp correction were to occur, tighter financial conditions could drag down world growth," she said. Tech company bosses are downplaying the doomsayers. The current AI boom is an industrial, rather than financial or banking, bubble and will be beneficial for society even if it bursts, Amazon founder Jeff Bezos said. "The ones that are industrial are not nearly as bad. It could even be good because when the dust settles and you see who are the winners, society benefits from those inventions," Bezos said at a recent tech conference in Italy. He compared it to a previous biotech bubble in the 1990s that resulted in new life-saving drugs. The excitement around AI is drawing in a huge wave of money to fund new business ideas, but it's also clouding investors' judgment, Bezos said. "Every company gets funded, the good ideas and the bad ideas. And investors have a hard time in the middle of this excitement distinguishing between the good and bad ideas and so that's also probably happening today," he said. On a tour last month of a Texas data center, OpenAI CEO Sam Altman predicted people will "make some dumb capital allocations" and there will be short-term ups and downs of overinvestment and underinvestment. But he added that "over the arc that we have to plan over, we are confident that this technology will drive a new wave of unprecedented economic growth," along with scientific breakthroughs, improvements to quality of life and "new ways to express creativity." Nvidia CEO Jensen Huang acknowledged in a CNBC interview on Wednesday that OpenAI doesn't yet have the money to buy its chips, but "they're going to have to raise that money" through revenue, which "is growing exponentially," along with equity or debt. Huang said he also believes a transition has happened as leading AI developers are moving from chatbots that operated "basically at a loss" because the models "weren't useful enough" to one in which the AI systems are capable of higher-level reasoning. "It's doing research before it answers a question," he said. "It goes on the web and studies other PDFs and websites, it can now use tools, generate information for you, and it creates responses that are really useful." AI companies have spent more than a year pitching the transformative potential of "AI agents" that can go beyond a chatbot's capability by being able to access a person's computer and do work tasks on their behalf. But as the initial hype fades, Forrester analyst Sudha Maheshwari said businesses looking to buy these AI tools are taking a closer look at whether they're getting enough return on their investments. "Every bubble inevitably bursts, and in 2026, AI will lose its sheen, trading its tiara for a hard hat," she wrote in a report Wednesday.

AI firms vulnerable to sharp drop in valuations, Bank of England warns

(Alliance News) - Tech firms are vulnerable to the risk that soaring valuations will drop sharply amid potentially "disappointing" progress around artificial intelligence, AI, the Bank of England has warned. The risk of a "sharp correction" in the financial markets has increased, the Bank's Financial Policy Committee, FPC said. The minutes of the FPC's latest meeting read: "On a number of measures, equity market valuations appear stretched, particularly for technology companies focused on artificial intelligence. "This, when combined with increasing concentration within market indices, leaves equity markets particularly exposed should expectations around the impact of AI become less optimistic." It said there was a risk that "disappointing" progress on AI capability or adoption, or increased competition could drive valuations lower across the sector. "Material bottlenecks to AI progress" including across power, data, or commodity supply chains could also harm valuations, particularly for firms who are expected to benefit from greater AI investment, the FPC said. It comes at a time that valuations for tech firms have boomed amid expectations that the adoption of AI technology will ramp up around the world. Huge technology companies like Nvidia Corp, Alphabet Inc's Google and Microsoft Corp have all seen their share prices soar over the past year. By Anna Wise, PA Business Reporter