Former White House Economists Say AI Bubble Is ‘Still Inflating’ – How Anthropic, OpenAI Could Fuel It

Economists Jared Bernstein and Ryan Cummings said the gap between valuations and heavy spending by AI firms and actual profits has continued to widen.

• The economists noted that several developments in recent months indicate that the AI bubble is “alive and well,” as AI companies prepare to go public.          
• They warned that if AI investments fail to generate strong returns over the next five to seven years, it could lead to ‘investor fatigue.’
• Last month, both Anthropic and OpenAI filed paperwork with the Securities and Exchange Commission to make an initial public offering, though the price and number of shares to be offered are yet to be disclosed.

Former White House economists Jared Bernstein and Ryan Cummings said the recent rally in AI-related stocks has strengthened their view that the AI bubble is “still inflating,” reiterating their warning from last year that soaring AI valuations increasingly resemble an asset-price bubble.

The economists said the broader stock market has gained about 10% since their warning, while AI-related stocks have climbed around 25%. However, the gap between valuations and heavy spending on the one hand and actual profits on the other has continued to widen.

In a Substack post on Wednesday, they noted that several developments over the recent months show that the AI bubble is “alive and well,” especially AI companies preparing to go public.

Public Listings To Provide Greater Transparency

Following SpaceX’s record-breaking IPO, AI giants Anthropic and OpenAI have also filed to list their shares. Last month, both Anthropic and OpenAI filed paperwork with the Securities and Exchange Commission to make an initial public offering (IPO), though the price and number of shares to be offered are yet to be disclosed.

Bernstein and Cummings said that until now, investors could only gain limited exposure to these firms through private funding rounds or indirectly via companies such as Microsoft (MSFT) and Amazon (AMZN). 

They said the public listings do not necessarily signal an imminent market crash. Instead, they will give investors greater transparency to better assess whether current valuations are justified.

“In other words, greater public exposure means more information about profits, losses, share prices, volatility, all factors that will feed into investors’ bubble assessments,” the post read.

Hyperscalers’ Spending A Bigger Concern

Bernstein and Cummings said concerns about an AI bubble are driven mainly by publicly traded technology companies that continue to spend heavily on AI despite limited financial returns.

According to estimates from Goldman Sachs, hyperscalers are on track to invest more than $750 billion in AI infrastructure this year and nearly $1 trillion next year. The economists noted that technology investment now accounts for almost 5% of the U.S. GDP, exceeding levels seen during the dot-com bubble.

They argued that such spending is difficult to sustain unless it begins to generate meaningful profits. Companies such as Amazon, Alphabet, Microsoft, and Meta have largely funded AI expansion using cash generated from their core businesses, but their free cash flow is shrinking as AI investments continue to rise. Some firms are now turning to debt markets to finance their AI spending.

The economists warned that if AI investments fail to generate strong returns over the next five to seven years, there could be “investor fatigue.” That could lead to lower valuations as markets adjust to weaker-than-expected profits, potentially causing the current AI bubble to deflate.

Retail Sentiment On MAGS ETF

Meanwhile, retail sentiment surrounding the Roundhill Magnificent Seven ETF (MAGS) changed to ‘neutral’ from ‘bullish’ a day earlier.

At the time of writing, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, fell 0.8%; the Invesco QQQ Trust ETF (QQQ) was down 0.7%; and the SPDR Dow Jones Industrial Average ETF Trust (DIA) declined 1.3%. 

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