Three years ago, OpenAI released the wildly popular ChatGPT, sparking widespread interest in artificial intelligence. The AI craze. Despite the continued influx of funds, there are growing doubts about whether this craze can be sustained.
From Nvidia recently The stock was sold off, to Oracle. From the company's stock price plummeting after reporting increased AI spending to the deteriorating market sentiment surrounding OpenAI-related companies, all signs indicate that investor skepticism towards AI is growing.
Looking ahead to 2026, the heated debate on Wall Street about the AI bubble is starting to shift. There's a general consensus that it is a bubble, and the debate centers on what will ultimately burst it, and whether to manage AI risk exposure before the potential bubble bursts, or to take the risk of doubling down and capitalizing on this game-changing technology. The technology of rules.
Jim Morrow, CEO of capital management firm Callodine Capital Management, said: “We are at a critical stage in the economic cycle. It’s a great story, but we’re a bit eager to wait and see if the returns on investment will be good.”
The unsettling aspects of AI trading include its commercial applications, the enormous costs of developing it, and whether consumers will ultimately pay for these services. These answers will have a significant impact on the future of the stock market. The S&P 500's nearly three-year bull market was largely driven by Google and Microsoft. Tech giants, as well as chipmakers Nvidia and Broadcom This is driven by companies benefiting from spending on AI infrastructure. If they stop rising, the US stock market bull run could very well come to an abrupt end.
"These stocks don't wait for the growth rate to decline before they correct; they correct when the growth rate stops accelerating," said Sameer Bhasin, head of Value Point Capital.
Of course, there are still many reasons to remain optimistic. Tech giants, which account for the majority of AI spending, possess vast resources and are committed to continuing to invest in the coming years. Furthermore, AI service developers like Alphabet's Google are constantly developing new models. This is precisely the crux of the debate.
Here are the key factors that Wall Street leaders believe could burst the bubble:
Financing
OpenAI alone plans to invest $1.4 trillion over the next few years, but its revenue is far below its operating costs. According to previous media reports, the company expects to lose $115 billion by 2029, but will not generate positive cash flow until 2030.
So far, the company has had no problem raising funds, having raised $40 billion earlier this year from SoftBank Group and other investors. In September, Nvidia pledged to invest up to $100 billion, one of a series of deals where the chipmaker is providing cash to its customers, raising concerns about revolving financing in the artificial intelligence industry.
OpenAI could run into trouble if investors become reluctant to commit more funds. The consequences could then affect related companies, such as computing service provider CoreWeave Inc.
“Think about it, there are trillions of dollars concentrated in a few themes and companies right now, and they’ll all be out the door the moment those themes show even the short-term problems, or signs that they’re overvalued to the point that they can’t keep growing,” said Eric Clark, portfolio manager at Rational Dynamic Brands Fund.
In addition, many other companies also rely on external funding to achieve their artificial intelligence development goals. For example, for building data centers. Oracle has issued tens of billions of dollars in bonds, requiring substantial funding. Unlike equity investors who primarily profit from rising stock prices, using debt financing puts pressure on the company because bondholders are required to receive cash repayments on schedule.
Meanwhile, credit default swaps, a metric for Oracle's credit risk, hit their highest level since 2009. An Oracle spokesperson said in a statement that the company remains confident in its ability to meet its obligations and its future expansion plans.
Kim Forrest, chief investment officer at Bokeh Capital Partners, said: “Credit investors are smarter than equity investors, or at least they care about the right thing—getting their investment back.”
Tech giants' spending
Alphabet, Microsoft , Amazon Meta expects capital expenditures to exceed $400 billion over the next 12 months, with the majority going to data centers . While these companies are moving from cloud computing... While AI-related revenue growth was achieved in advertising and other businesses, it is still far from sufficient compared to the costs incurred.
“Any stagnation or slowdown in growth expectations will eventually lead us to a situation where the market says, ‘Okay, there’s a problem here,’” said Michael O’Rourke, chief market strategist at Jonestrading.
Data compiled by the media shows that, including Apple The company, Nvidia and Tesla The "Big Seven" tech giants, including [names of tech giants], are projected to see 18% profit growth in 2026, the lowest level in four years.
Furthermore, the soaring depreciation costs resulting from the data center boom are a major concern. In the last quarter of 2023, Alphabet, Microsoft , and Meta's combined depreciation costs totaled approximately $10 billion. In September, this figure rose to nearly $22 billion. It is projected to reach $30 billion by this time next year.
All of these factors could put pressure on stock buybacks and dividends (i.e., returning cash to shareholders). According to data compiled by the media, after accounting for shareholder returns, Meta and Microsoft are projected to have negative free cash flow by 2026, while Alphabet is expected to barely break even.
Behind the concerns about the massive spending, Wall Street is actually worried about the strategic shift it represents. For a long time, the value of large tech companies has been built on their ability to generate rapid revenue growth at low cost, resulting in huge free cash flow. But their artificial intelligence initiatives are disrupting that.
“If we continue to leverage our company in the hope that we can profit from it, then the price-to-earnings ratio will go down,” O’Rourke said. “If things don’t go your way, then the whole strategic shift will be a serious mistake.”
Rational/Irrational Exuberance
While large tech companies are highly valued, their valuations are far from excessive compared to past market booms. Artificial intelligence is often compared to the dot-com bubble burst, but the enormous gains from AI are entirely different from those during the dot-com boom. For example, according to data compiled by the media, the Nasdaq, dominated by tech stocks, has a forward price-to-earnings ratio of 26. At the height of the dot-com bubble, this figure exceeded 80.
BlackRock Tony DeSpirito, Global Chief Investment Officer and Fundamental Equity Portfolio Manager at BlackRock, said: “These valuation multiples are not at the levels of the dot-com bubble. That’s not to say there wasn’t speculation or irrational exuberance involved, because there was, but I don’t think there was any of that exuberance in the ‘Big Seven’.”
Analysts point out that Palantir Technologies Inc., with a price-to-earnings ratio exceeding 180, is among the most overvalued AI stocks. The same is true for Snowflake Inc., with a forward P/E ratio approaching 140. However, Nvidia, Alphabet, and Microsoft all have P/E ratios below 30, which is relatively modest considering the excitement surrounding them.
All of this puts investors in a dilemma. Yes, the risks are obvious, even as investors continue to flock to AI stocks. But for now, most companies' stock prices haven't reached levels that would trigger panic. The question is, where is AI trading headed in the future?
Value Point's Bhasin said, "This herd mentality will collapse. It may not collapse like it did in 2000. But we will see market rotation."
(Article source: CLS)
