A severe correction downwards would hit global growth and particularly affect developing countries, warned Kristalina Georgieva in a speech before the IMF's annual meeting this week.
Extremely highly valued companies – most recently Open AI, which is behind Chat GPT, which was recently valued at $500 billion – and deals where AI companies buy into each other have fueled bubble concerns.
It is difficult in all this excitement to distinguish between good and bad ideas, said Jeff Bezos, chairman of the e-commerce and cloud services company Amazon last week.
Warning light is on
Bezos does not rule out that a lot can go up in smoke. But he believes that everyone will ultimately win from the AI hype:
When the dust has settled.
The bubble will burst when you see that "the incredibly large investments" do not deliver what you had hoped for, according to Mark Cudmore, macro strategist at Bloomberg.
It may be a quarter or two away, he says.
Edward Yardeni, financial advisor at Yardeni Research, highlights a warning light: The S&P 500 stock prices are at historically high levels – if you compare with expected profits – almost the same level as before the dot-com bubble 25 years ago.
We are moving into a bubble, clearly, he tells Bloomberg.
I do not want the valuations to go higher, he adds.
Not even Open AI's Chat GPT dares to dismiss the bubble risk. To the question "Do we have an AI bubble, which can become like the IT bubble around the turn of the millennium?" the answer is:
"We may have an 'AI bubble' to some extent, but that does not have to mean that we see the same type of collapse as then – and much depends on what happens in the future."
"A tremendous hype"
Maria Landeborn, analyst at Danske Bank, describes the situation as "a tremendous hype". And she does not rule out a correction, large or small. But she sees major differences from the IT bubble.
Then there were many unprofitable companies without revenue in the mix. The AI wave is driven by the world's most profitable companies, which are investing with their own cash flow.
They make a lot of money. They are extremely successful.
Landeborn expects the upward trend to continue longer than many think:
Here and now it is not a house of cards.
The tech giants have taken growth and profitability to a new level. And they have done it over a long period. The US stock market should be more highly valued than it was when it was oil companies and industry that weighed the most.
A rapid development of artificial intelligence (AI) has characterized the world economy for several years. The most driving actors in the sector are the tech giants on Wall Street: The Magnificent 7.
It is about seven companies – in order of size Nvidia, Microsoft, Apple, Alphabet, Amazon, Meta and Tesla – where several stand out as the largest AI investors by far.
Since 2020, the combined market value of the Magnificent 7 companies has increased from $8,500 billion to $19,800 billion. Their share of the S&P 500 index has increased from around 27 percent in 2020 to 34-35 percent this year.
