Are We In An AI 'Bubble' and What Happens If It Bursts?

By Billy Friese-Greene

With billions pouring into AI startups – many of which are still pre-revenue — the question must be asked: is this level of investment sustainable? Sam Altman, CEO of OpenAI, has claimed that AI is 'the most important thing to happen in a very long time' but admitted investors have become “overexcited” in recent years. Opinions are split. But with echoes of the 1990s dot-com bubble, where over-investment with little tangible result ended in a market crash, an important question grows: are we in an AI bubble – and what happens if it bursts?

What exactly is an AI bubble?

To understand the current AI frenzy, there is nowhere more apt to explore this idea than the dot-com bubble. In the late 1990s, the popularity of the internet facilitated an enormous investment in telecommunications infrastructure. When the demand for such infrastructure did not materialize, a wave of bankruptcies across the sector were initiated. 

Similarities between the two are glaring. A recent MIT report revealed that 95% of companies investing in generative AI have yet to see any financial returns. This evokes the question: has optimism been mistaken for inevitability? Has the capital injection into generative AI been one rooted in the fear of missing out, rather than educated predictions? 

Consider this: stocks such as Palantir’s price-to-earnings ratio are north of 500, at a time when even 50 would set off investor alarm bells. These figures paint a concerning picture. Yet, tech giants like the so-called “Magnificent 7” – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – seem to only be getting started.

Should we be worried?

Yes and no. Market corrections are a natural, even healthy, part of economic cycles. Following the dot-com bubble burst, the S&P 500 fell by nearly 50% the following two years. Yet, the stark difference today is that the US economy is even more heavily reliant on AI. 

In fact, it seems to be propping up the entire economy. More than half of S&P 500 growth since 2023 came from the ‘Magnificent 7’, who now collectively make up more than a third of the S&P 500. These tech giants have been trailblazers in investment in AI.  

The capital that has been invested in AI is on such an enormous scale that it would eliminate billions – if not trillions – off global markets, if its popularity was to suddenly falter. This would trigger a domino effect, where the economy would be dragged into recession, leading to increased government spending and heightened public debt.

How Would this Affect the Average Person?

If the correction spirals into a full-blown crash, job losses could follow – ironic seeing as AI is seen as a job-destroying force. A recession benefits no one, least of all the average worker, and with the weight of the US economy sitting on AI’s shoulders, scary times may be ahead.

The Short Term.

For now, the AI craze seems to be powering on.

As recently as the 22nd September, Nvidia announced plans to invest $100 billion in OpenAI to support the construction of massive AI data centres. In turn, OpenAI has announced it plans to buy millions of Nvidia processing chips. Following this announcement, Nvidia’s shares spiked almost 3 %.

But again, for sceptics, this raises eyebrows.  Despite receiving 5 billion visits in July, ChatGPT remains unprofitable. Much of this momentum still feels… illusionary. 

Final Thoughts: Inevitability or Inflated Delusion?

Time will tell. But if the AI bubble was to burst, the fallout would likely be global. We’re becoming desensitized to the headlines announcing hundred-billion-dollar investments by tech giants. This societal revolution at the hands of generative AI should not be seen as an inevitability. Without major, tangible breakthroughs, there will come a time when the markets start to cool. What will come will reshape this era as we know it.