'Red Flag': Analysts Sound Major Alarms As AI Bubble Now 'Bigger' Than Subprime

Several analysts are sounding alarms about the artificial intelligence industry being a major financial bubble that could potentially tip the global economy into a severe recession.

MarketWatch reported on Friday that the MacroStrategy Partnership, an independent research firm, has published a new note claiming that the bubble generated by AI is now 17 times larger than the dot-com bubble in the late 1990s, and four times bigger than the global real-estate bubble that crashed the economy in 2008.

The note was written by a team of analysts, including Julien Garran, who previously led the commodities strategy team at multinational investment bank UBS.

Garran contends that companies have vastly overhyped the capabilities of AI large language models (LLMs), and he pointed to data showing that the adoption rate of LLMs among large businesses has already started to decline. He also thinks that flagship LLM ChatGPT may have "hit a wall" with its latest release, which he said hasn't delivered noticeably better performance than previous releases, despite costing 10 times as much.

The consequences for the economy, he warns, could be dire.

"The danger is not only that this pushes us into a zone 4 deflationary bust on our investment clock, but that it also makes it hard for the Fed and the Trump administration to stimulate the economy out of it," he writes in the investment note.

Garran isn't the only analyst expressing extreme anxiety about the potential for an AI bubble to bring down the economy.

In a Friday interview with Axios, Dario Perkins, managing director of global macro at TS Lombard, said that tech companies are increasingly taking on massive debts in their race to build out AI data centers in a way that is reminiscent of the debts held by companies during the dot-com and subprime mortgage bubbles.

Perkins told Axios that he's particularly wary because the big tech companies are claiming "they don't care whether the investment has any return, because they're in a race."

"Surely that in itself is a red flag," he added.

CNBC reported on Friday that Goldman Sachs SEO David Solomon told an audience at the Italian Tech Week conference that he expected a "drawdown" in the stock market over the next year or two given that so much money has been pumped into AI ventures in such a short time.

"I think that there will be a lot of capital that’s deployed that will turn out to not deliver returns, and when that happens, people won’t feel good," he said.

Solomon wouldn't go so far as to definitively declare AI to be a bubble, but he did say some investors are "out on the risk curve because they’re excited," which is a telltale sign of a financial bubble.

According to CNBC, Amazon CEO Jeff Bezos, who was also attending Italian Tech Week, said on Friday that there was a bubble in the AI industry, although he insisted that the technology would be a major benefit for humanity.

"Investors have a hard time in the middle of this excitement, distinguishing between the good ideas and the bad ideas," Bezos said of the AI industry. "And that’s also probably happening today."

Perkins made no predictions about when the AI bubble will pop, but he argued that it's definitely much closer to the end of the cycle than the beginning.

"I wouldn't touch this stuff now," he told Axios. "We're much closer to 2000 than 1995."