Concerns are escalating on Wall Street regarding the potential overheating of the artificial intelligence (AI) trade, following months of remarkable gains in AI-related stocks and rising corporate investments. Warnings about the possibility of a bubble have intensified, particularly from leading figures in finance.
Jamie Dimon, CEO of JPMorgan, articulated these concerns during a press briefing, categorizing elevated asset prices as a significant worry. He stated, “When asset prices are elevated, you have further to fall,” while acknowledging that consumer spending remains robust and companies are still profitable. Nonetheless, he indicated that current valuations and credit spreads appear stretched, suggesting a potentially precarious situation. Dimon noted, “You have a lot of assets out there which look like they’re entering bubble territory,” implying that the situation could worsen.
In this climate of apprehension, recent sentiment data reveals an escalating level of investor exuberance. The latest Global Fund Manager Survey from Bank of America highlighted an “AI equity bubble” as the top global tail risk for the first time in its history. The survey, which reflects the views of around 200 fund managers managing nearly $500 billion in assets, also indicated a decline in cash levels to 3.8%, approaching BofA’s “sell” threshold of 3.7%. Historical patterns suggest that cash readings below 4% often coincide with peak risk appetite, which typically surfaces late in market cycles.
Institutional investor behavior displays a similar trend, with State Street’s Risk Appetite Index suggesting that major professional investors are entering the fourth quarter with notable bullishness, having accumulated riskier assets for five consecutive months. Nicholas Colas, co-founder of DataTrek, pointed out that unless there is a major shock to the system, it is unlikely that these investors will alter their optimistic stance.
Another troubling sign is the diminished correlation across sectors, which has dropped to its lowest level since the onset of the current bull market. Colas noted that such “unusually low” correlation readings often materialize when investor confidence is excessively high, a pattern that frequently precedes short-term market pullbacks.
Corporate investments are mirroring the bullish sentiment. Recently, Google announced a substantial $15 billion investment for a new data center hub in India, while shares of AMD rose following a partnership with Oracle. Additionally, Walmart revealed a collaboration with OpenAI to enhance AI-driven retail tools. OpenAI has been aggressively securing chip and infrastructure agreements, strengthening its supply chain in a move that some analysts argue could exacerbate bubble risks.
Michael O’Rourke, chief market strategist at JonesTrading, expressed a strong belief that an AI bubble is emerging, citing notable tech megadeals as symptomatic of an overheated market. He pointed to Google’s massive data center project and OpenAI’s extensive investment plans against the backdrop of its comparatively modest revenue, suggesting a disconnect that investors should recognize. O’Rourke cautioned that upcoming earnings reports from major tech firms could be indicative of whether spending on AI infrastructure is hitting a critical juncture.
However, not all analysts share the sentiment that the market is in a state of mania. Some assert that the current market strength reflects genuine conviction rather than complacency, with the AI trade—despite showing signs of being stretched—still grounded in fundamental support. Lale Akoner, a global market analyst at eToro, argued against labeling it an AI bubble, suggesting it represents a period where investors are “pricing to perfection.” While she acknowledged elements of optimism and fear of missing out, she did not view the mood as universally euphoric, highlighting that many tech firms maintain solid balance sheets.
Nonetheless, as noted by DataTrek’s Colas, the prevailing optimism in the market significantly relies on whether Big Tech can deliver robust earnings. Analysts anticipate double-digit growth in earnings and revenues for major players like Nvidia, Microsoft, and Alphabet through 2026, which sets a high bar for performance, leaving little room for upside surprises in the upcoming financial disclosures.
