Enthusiasm about artificial intelligence has propelled markets to record highs this year. But the fierce ascent has also raised concerns about a bubble.
AI has been the dominant theme in markets since 2022, when OpenAI first launched ChatGPT. Optimism has since spread among investors about a potential transformative AI boom, and enormous amounts of money have flowed into tech stocks. Valuations have risen to historically expensive levels.
To some analysts, those are red flags that the market might be in a bubble -- when investors bid up stock prices beyond what they're worth, creating an unsustainable rally that often results in a significant downturn, as seen during the dot-com bubble that burst in 2000.
Big tech companies like Meta (META), Microsoft (MSFT) and Amazon (AMZN) have spent hundreds of billions of dollars on data centers and infrastructure to build out and power AI, and have earmarked hundreds of billions of dollars for more spending.
These companies' earnings results continue to impress Wall Street, supporting elevated valuations and the rally in stocks. Yet concerns are growing about whether it is sustainable and what the fallout might be if there is a significant drop in stocks.
"Fired up by optimism about the productivity-enhancing potential of AI, global equity prices are surging," Kristalina Georgieva, managing director of the International Monetary Fund, said in a speech on Wednesday.
"Today's valuations are heading toward levels we saw during the bullishness about the internet 25 years ago," Georgieva said. "If a sharp correction were to occur, tighter financial conditions could drag down world growth."
Bubble nerves
Concerns about a potential bubble intensified in recent weeks as AI stars like Nvidia and OpenAI announced deals with circular financing that raised eyebrows that the top players might be propping up the market.
The rise in valuations and emergence of circular financing are among aspects that "rhyme with previous bubbles," according to strategists at Goldman Sachs.
"While it appears we are not in a bubble yet, high levels of market concentration and competition in the AI space suggest investors should continue to focus on diversification," the strategists said in a note.
Despite concerns, anything related to AI has been in high demand. OpenAI on Monday announced a new deal with chip company Advanced Micro Devices (AMD), sending AMD's shares soaring almost 24%.
The rally has drawn comparisons to the dot-com bubble. However, investors said there is a key difference: Big Tech companies now are actually profitable and delivering strong earnings results.