The market is drunk on artificial intelligence. Every fund manager, every retail punter, every insufferable tech bro is piling into the same few names: Nvidia, Microsoft, Alphabet. Valuations have detached from reality. The question is not whether this bubble will burst, but what triggers the pop.
Consider the price-to-earnings ratios. Nvidia trades at over 70 times earnings. That is not pricing in future growth; it is pricing in a future where AI conquers every industry overnight. It is the sort of multiple you see in a mania, not a mature market. Remember the dot-com blow-off? Cisco hit 200 times earnings before collapsing 80%. History does not repeat, but it often rhymes.
Central banks are not helping. The Bank of England and the Federal Reserve have signalled rate cuts on the horizon. Cheap money inflates asset prices. It encourages speculation over investment. We have seen this movie before. The Greenspan put, the Bernanke put, and now the Powell put. Every time policymakers intervene, they simply postpone the reckoning and make the eventual correction more painful.
Meanwhile, the real economy is flashing red. Gilt yields are rising in the UK, reflecting inflation that refuses to die. The yield on the 10-year gilt has crept above 4%. That matters because it increases the cost of capital for every business, including the AI darlings. If borrowing costs stay high, those distant future cash flows that justify today's valuations start looking awfully shaky.
Capital flight is another worry. Institutional investors are rotating out of bonds and into equities, chasing returns. But when the music stops, where will they hide? The rush for the exits will be disorderly. We saw it in 2022 when the Nasdaq fell 33%. The AI boom has been far more concentrated, far more leveraged. The correction will be sharper.
Fiscal responsibility is a joke. The UK government is borrowing to fund tax cuts and spending pledges. The US deficit is running at 6% of GDP. This is not sustainable. Eventually, the bond market will revolt. When that happens, risk assets will take the brunt. AI stocks, being the riskiest, will lead the decline.
Are there any good buys? Not in the mainstream. If you must hold tech, look at companies with real earnings and modest valuations, not fantasies. Or better yet, buy gold. It has no counterparty risk, no earnings multiple, and a historical habit of rising when central banks print money.
The crash is not imminent in the sense of next week. But the writing is on the wall. The AI bubble will deflate, and when it does, it will remind us that markets are not perpetual motion machines. They are driven by fear and greed, and right now greed is blinding everyone to the obvious.
