AI-driven market rally shows signs of overheating, economist warns
Investors riding the AI wave may want to tread carefully.
“Markets are getting a bit frothy right now, and it wouldn’t be surprising if we have a healthy correction,” RSM chief economist Joe Brusuelas told Yahoo Finance.
Brusuelas’s warning comes as the S&P 500 (^GSPC) and Nasdaq (^IXIC) notch new highs, volatility sits below long-term averages, and investor enthusiasm for artificial intelligence spills across the broader market.
In a report, Brusuelas said part of the reason the market has kept climbing has to do with the broader economic backdrop, in which growth is nearing its potential, unemployment remains relatively low at 4.3%, and inflation is rising but contained.
“Financial conditions remain conducive for investment,” Brusuelas noted.
Even so, RSM’s composite equity index, which measures returns against volatility, recently moved one standard deviation above its long-term trend. In the past four business cycles, that kind of move has preceded market corrections, even if they were brief.
“When you have a strong one-standard-deviation move in the way we have, it tends to suggest that equity valuations are stretched at best and overvalued at worst,” Brusuelas said. “It reflects the ongoing concentration risk across equity markets in the tech sector in general, and artificial intelligence in particular.”
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That suggests the market isn’t necessarily in bubble territory yet, but conditions look primed for a shakeout.
“We don’t think that it’s in a bubble,” Brusuelas said. “But we may be in a period where the market is due for a healthy correction to kick out speculators.”
That cautionary sentiment comes as Big Tech continues to dominate the market. Earlier this week, Nvidia (NVDA) announced plans to invest up to $100 billion in OpenAI (OPAI.PVT) to build out data centers and AI infrastructure. These kinds of moves have fueled this year’s rally but also raised questions about the sustainability of that kind of spending.
Brusuelas described the $100 billion investment as “a lot of money” and one that could spur “having second thoughts.”
“We should be asking hard questions about malinvestment,” he said.
He pointed to the lessons of the dot-com bubble as a cautionary tale. In the late 1990s, billions flowed into internet infrastructure projects, many of which proved unnecessary.
“We developed way too much bandwidth that we couldn’t use properly,” Brusuelas recalled.