A little over a year ago, I shared my view that the AI bubble was ahead of us, not behind us. The point then was that while AI-associated stocks had rallied significantly, it was nothing compared to the likely outcomes that were ahead. I still think the bubble is likely ahead of us, but the AI story has reached a more dangerous phase.
In this phase, the AI investment boom is still accelerating and is likely to continue to be less sensitive to traditional cyclical pressures such as interest rates or stock prices. A lot of people with access to a ton of capital believe that with a massive sum of investment, they’ll be able to control the universe. They are pushing to spend in line with those stakes, and only a change in their belief that this is attainable—not a decline in their stock price, or a turn in the AI hype cycle—is going to stop them.
In the past two months, the race has become a resource grab, kicked off by OpenAI announcing a wave of behemoth investment deals. This in turn has driven the other major players to increase their own capex plans. And governments are increasingly getting in the mix, recognizing the transformative potential of artificial intelligence as a source of geopolitical power.
I recently shared my thoughts with our clients on why the AI boom has entered a more dangerous chapter. Below, I’ve included an excerpt from that research.
Greg Jensen
Co-Chief Investment Officer, Bridgewater Associates
The AI Capex Boom Is Shifting Toward a More Dangerous Phase of Exponential Growth
This new phase of the AI story is more dangerous for four reasons:
- The exponential growth of needed compute means that a boom that was mostly growing exponentially in the digital realm now requires a huge physical component that is also growing exponentially and facing many new constraints.
- The capital for the early phase of the buildout was mostly paid for by the major tech firms themselves through their free cash flow. Exponential growth in capex means huge sums of capital will increasingly be required from outside the existing ecosystem.
- Valuations have risen and are now extrapolating significant—albeit not exponential—growth from here. A year ago, we thought most of the ecosystem was measurably cheap relative to most likely outcomes. While today we still see a favorable outlook for much of the AI ecosystem, the situation is more nuanced.
- The economy has an increasingly concentrated dependence on AI as a growth driver. AI is now responsible for roughly one-third of the US’s economic growth this year. As investment grows exponentially, it will increasingly matter for US and global growth, creating a single point of failure and potential future economic fragility.
Going forward, there is a reasonable probability that we will soon find ourselves in a bubble. AI is likely to remain an alien intelligence for some time, creating a jagged frontier of economic impact where it is exceptionally useful at certain tasks, like coding, but struggles with other fundamental requirements, like long-term planning. But the science will keep improving, and companies will continue to learn to build around AI and harness its benefits. A “Barnes and Noble moment,” when every company realizes that AI poses an existential threat to their way of doing business, is capable of broadening out the investment boom. Pricing can get a lot more stretched. And monetary policy can become a lot more supportive, depending on how the Fed balances persistent inflation risks against a still-weak labor market.
At the same time, there are multiple risks for how the AI buildout can go wrong. None of these are our base case, but they are still possibilities:
- A massive amount of capital will be required, and we think the companies involved will be able to raise it, but that isn’t yet a settled question.
- A technological breakthrough in how compute is supplied could make much of the data center capacity companies are now building obsolete.
- The LLM paradigm could stall and new breakthroughs requiring a different paradigm and understanding beyond language may be necessary for further advancements.
- Longer term, the populist backlash against AI could prompt much more aggressive regulation, particularly as more households face rising power prices. In the US, AI could end up being a key focal point of the 2028 election.
The charts below highlight the significant shifts we are seeing as we enter this new, more dangerous phase. The top-left chart is our base-case projection of global and US data center capacity growth along with adjustments for recently announced investment deals and the potential acceleration of sovereign spend. The top-right chart shows how, following recent hyperscaler earnings, consensus estimates for forward capex have finally converged to the amounts implied by our capacity forecast, reflecting potential exponential growth moving closer to being priced in. And finally, the bottom chart shows the recent sharp increase in the mean forward valuation of our global AI universe.
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