Fears that Artificial Intelligence (AI) stocks are in a bubble reemerged this week as a few prominent American CEOs and various market commentators suggested that valuations are becoming overheated. Notably, Michael Burry, an investor who wagered on a US housing market crash in the run-up to the Global Financial Crisis, has placed a $1.1 billion bet on falls in the values of AI darlings, Nvidia and Palantir.
Burry’s short position adds to the clamour of voices who have recently expressed concerns about frothy AI stocks, including Jamie Dimon, head of JP Morgan, and IMF chief economist Pierre-Olivier Gourinchas. The AI bubble concerns pulled the S&P 500 and Nasdaq indices down 1.2% and 2.1% on Tuesday, with Magnificent Seven stocks Meta and Nvidia taking much of the pain.
As we weigh up the case for and against AI stocks being in a bubble, it is worth remembering that these fears are not new. Since the term “Magnificent Seven” entered the market lexicon, traders and analysts have debated how high AI-themed stocks can climb and when they will tumble. Despite the warnings, the tech-heavy Nasdaq has doubled in value since the launch of ChatGPT in late 2022.
With individual stock valuations ranging from around $1.2 trillion to $4.6 trillion, performance of the Magnificent Seven has certainly been exuberant. Nvidia alone has added $1.6 trillion to its market capitalisation year-to-date. Sceptics argue high price-to-earnings ratios and lofty earnings expectations mean it is only a matter of time before AI-themed stocks come crashing down in a similar way to the bursting of the dotcom bubble in 2000.
One of the biggest worries for the doubters is the sheer amount of capital companies are sinking into data centres to power the AI boom and the risk that the investments will not deliver commensurate returns. Much of the spending is financed through vendor-financed “circular” deals where companies like AMD and Nvidia fund their customers’ purchases. Nvidia, for example, has invested $100 billion in OpenAI, which has, in turn, committed to buying its chips.
The setup is fragile because valuations and revenues depend on the continuous recycling of capital. If funding tightens, demand softens, or investors lose confidence, the loop could break, and valuations of all parties in the AI value chain could collapse. For sceptics, this suggests that the AI boom is driven as much by financial engineering as by sustainable demand.
But there are some equally compelling ways that the current AI bull run differs from the dotcom boom and bust. Whereas dotcom mania encompassed many startups with unproven business models and zero profits, today’s AI frenzy is driven largely by well-established technology businesses with robust earnings growth, strong free cash flow, and diverse revenue streams.
Furthermore, even though price-earnings ratios are relatively high, the Magnificent Seven have not yet breached the extravagant levels seen among the “Four Horsemen” of the dotcom era (Microsoft, Cisco, Dell, and Intel). Outside of Tesla (P:E above 250), the others are trading at high but manageable levels, especially given the consistency of their financial performance.
Indeed, AI stocks posted strong results in the third-quarter earnings season (only Nvidia remains to report), with healthy profits underpinning their valuations. Investors have certainly priced AI stocks for strong growth, but as Nvidia CEO Jensen Huang says, “We’re at the beginning of a very long build-out of artificial intelligence.”
Our considered view is that two things can be true at the same time: AI will transform economies and deliver super profits in the long run, but markets may still be running ahead of themselves. Given the excellent returns of the past three years – broken briefly by a sharp correction in April 2025 – occasional breathers seem inevitable and even healthy. Thus, we might even see the slight drop in tech share prices this week as a welcome event.
The fact that investors are still buying into dips shows that faith in AI remains strong. But even with the momentum fully behind AI, investors should also be alert to the risks. Macroeconomic factors, particularly interest rates, will affect investors’ appetite for stocks as well as the cost of financing AI infrastructure. Investors will be watching closely as capital costs rise and may react negatively if earnings disappoint in quarters to come.
The AI boom also depends on the ability of the energy sector to keep up with its power-hungry needs. There is a non-trivial risk that power grids will not expand fast enough to keep up with the demand for new data centres. Furthermore, geopolitical tensions and supply chain disruptions could delay chip production or trigger new export controls. Finally, regulation around data use, privacy and AI safety could impede or accelerate AI adoption.
At Dynasty, our strategy is to maintain full benchmark exposure to big tech and AI in our global house-view equity portfolios, rather than being underweight or overweight. However, we acknowledge that AI dominance raises concentration risks, with the top 10 stocks in the S&P 500 accounting for 40% of the index’s valuation. Short-term volatility seems inevitable, but we cannot predict the timing of market spikes and drops.
We are optimistic that the investments in AI software and infrastructure will be transformative for business and individuals in the longer term, much like railways and the internet did in previous eras. Even if the winners and losers are not yet clear, equities across the broader market sectors that successfully adopt AI will improve efficiencies and increase shareholder value. Periodic corrections should be seen not as the end of the story, but as natural pauses in a much longer growth trajectory.
“Bubbles are usually only perceived in retrospect.”
– Ray Dalio, American billionaire and hedge fund manager
“A bubble like a banking bubble, a crisis in the banking system, that’s just bad. The ones that are industrial are not nearly as bad. [They] could even be good because when the dust settles and you see who the winners [are], society benefits from those inventions.”
– Jeff Bezos, founder and executive chairman of Amazon
Global News
- Wall Street CEOs, including those of Morgan Stanley and Goldman Sachs, warned on Tuesday that US equity markets could experience a 10%–15% pullback over the next 12 to 24 months, citing historically rich valuations and rising investor complacency. Analysts say sentiment remains stretched as annual gains become increasingly concentrated in a handful of large tech firms, raising concerns that, even without a major economic trigger, shifts in confidence rather than fundamentals could spark a meaningful correction. The S&P 500 has gained 19.6% over the past 12 months, boosted by strong corporate earnings and investors’ enthusiasm about AI.
- A sharp pullback in US stocks on Tuesday, following their steepest drop since early October, has sparked renewed debate among investors about how stretched valuations truly are. With the S&P 500 and Nasdaq 100 both suffering notable declines amid the market’s narrow rally, analysts pointed to profit-taking in mega caps, heightened sensitivity to unfavourable news, and overly optimistic assumptions about AI and rate cuts as the triggers. While the correction may be temporary, the episode highlights the market’s current vulnerability and raises questions about whether broader participation and earnings growth can support the lofty expectations priced in.
- OpenAI CFO Sarah Friar urged investors during the Wall Street Journal’s Tech Live conference in California on Wednesday to adopt a more optimistic view of the AI sector, arguing that concerns about a potential bubble overlook the scale and long-term value of current investment. She revealed that OpenAI plans to spend more than $1.4 trillion on infrastructure, including computing power and data centers, to support the next wave of AI innovation. Friar said this unprecedented commitment reflects the sector’s transformative potential and stressed that sustained investment, rather than restraint, is essential to unlocking AI’s full economic and societal impact.
- Nvidia’s meteoric rise to a $5 trillion market capitalisation on 29 October made it more valuable than the combined stock markets of Germany, the UK, and France, underscoring the company’s extraordinary influence in the global financial landscape. Now accounting for over 8% of the S&P 500’s total value, Nvidia alone rivals the entire Japanese Topix index and far exceeds the market caps of tech peers like Apple, Microsoft, and Amazon, which each sit below $4 trillion. The milestone highlights Nvidia’s central role in the AI-driven market transformation, cementing it as the defining force behind the current equity rally. Yet, analysts warn that such extreme concentration leaves both US and global indices increasingly tethered to one stock’s performance, amplifying volatility should investor sentiment around AI shift.
- US companies announced 153,074 job cuts in October, nearly three times more than a year ago and the highest for any October since 2003, as AI reshapes industries and cost-cutting deepens, according to data released on Wednesday by Challenger, Gray & Christmas. The tech and warehousing sectors led the cuts. Year-to-date layoffs have topped 1 million – the most since the pandemic – while announced hiring plans are at their lowest since 2011, and seasonal hiring is the weakest since tracking began in 2012. Analysts warn the spike signals the end of the “low-hire, low-fire” era, suggesting growing labour-market strain that could weigh on consumer confidence and broader economic growth.
- The US Supreme Court hearing on Wednesday over the legality of the administration’s tariff regime sparked a positive reaction in tariff-linked equities, as questioning from several justices, including the chief justice, appeared to raise investor expectations that the tariffs could be ruled unlawful. Such a decision would likely trigger rebates to US companies, providing a potential fiscal boost to the economy. However, analysts expect that if the existing tariffs are overturned, they would be reintroduced under new legal grounds, maintaining a similar overall tariff rate but with some duties rising and others falling. UBS economist Paul Donovan noted that previous tariff reductions did not lead to lower consumer prices, suggesting that a restructured system could add a modest upward pressure on inflation over time.
- The US government shutdown is now the longest in history at 38 days, as Congress remains gridlocked over healthcare and spending. Funding for troops and food aid could run out by month-end, and key Labour Department data collection has halted. Each week of disruption costs the economy $10 billion to $30 billion, analysts estimated on Wednesday. From today, the Trump administration will cut flights at 40 US airports by 4%, with reductions set to rise to 10% by next Friday if the government shutdown continues, according to an FAA emergency order.
- US manufacturing contracted for an eighth straight month in October, with the Institute for Supply Management’s (ISM’s) PMI slipping month-on-month, it said on Monday. New orders stayed weak, and suppliers faced longer delivery times amid tariffs on imports. Manufacturers told the ISM that importing remains cheaper than sourcing locally, despite US President Donald Trump’s tariffs aimed at reviving the sector. The PMI remained above the threshold consistent with broader economic growth.
- China will suspend additional export controls on rare-earth metals and end investigations targeting US semiconductor companies, the White House said last Saturday. This follows a US-China trade deal aimed at easing tensions between the two economies. China will issue “general licenses” for the export of rare earths, which will roll back controls imposed in April 2025 and October 2022. These licenses allow repeated shipments to pre-approved buyers, benefiting US end users and their global suppliers.
- Chinese Premier Li Qiang said China’s economy will maintain its current pace, highlighting the market’s appeal to global firms and addressing concerns about trade imbalances. He projected that GDP would surpass $23.9 trillion in five years, implying an average annual growth rate of about 4% through 2030. Speaking at the China International Import Expo in Shanghai on Wednesday, Li emphasised the need to expand domestic demand and consumption. While not a formal target, economists see the figure as a growth floor and a signal of Beijing’s focus on quality expansion.
- Amazon Web Services and OpenAI on Monday announced a $38 billion, seven-year, cloud infrastructure deal that will allow OpenAI to use Amazon’s computing network and Nvidia processors to develop and run its advanced AI models. The partnership, which begins immediately and is expected to reach full capacity by late 2026, ends OpenAI’s exclusive cloud arrangement with Microsoft and underscores Amazon’s growing role in supporting large-scale AI development, as Nvidia continues to dominate the global AI hardware market.
- Microsoft on Monday said it had signed a $9.7 billion, five-year deal with data-centre operator IREN to access Nvidia’s advanced chips, helping ease the computing crunch that has been limiting its AI ambitions. IREN shares surged as much as 24.7%, while Dell, which supplies some Nvidia chips and other equipment, rose about 1%. The deal lets Microsoft boost AI capacity without new data centres or costly chips, easing supply constraints and supporting apps like ChatGPT.
- Apple plans to pay about $1 billion a year for access to Google’s 1.2 trillion-parameter AI model to power a significant overhaul of Siri, sources told Bloomberg on Tuesday. The companies are finalising an agreement after months of testing other models, including ChatGPT and Claude. Apple aims to use Google’s technology as a stopgap while developing its own advanced AI systems, with new Siri features expected to debut next year.
- Pfizer announced it had removed several conditions from its offer to acquire Metsera, after a Delaware judge rejected its request to block Novo Nordisk’s $10 billion bid for the obesity-drug developer on Wednesday. The ruling allows Metsera to accept Novo’s higher offer, intensifying the takeover battle in the fast-growing $150 billion obesity treatment market. Pfizer’s revised bid reflects its push to regain momentum after the legal setback, while Novo faces potential US antitrust scrutiny over its deal structure. Meanwhile, Novo Nordisk on Wednesday cut its forecast for the fourth time this year due to weak sales of Wegovy and Ozempic. Revenue is now expected to rise to 11% following disappointing third-quarter results.
- Eli Lilly and Novo Nordisk struck deals with the Trump administration to cut prices for their blockbuster weight-loss drugs Zepbound and Wegovy in exchange for tariff relief and expanded Medicare coverage. The agreements, announced yesterday during a White House event, give the drugmakers a three-year exemption from upcoming import duties. Trump called the move “a triumph for American patients”.
- Tesla shareholders yesterday approved a $1 trillion compensation package for CEO Elon Musk, the largest ever awarded to a corporate leader. More than 75% of votes supported the plan, paving the way for Musk to become the first trillionaire. The payout depends on Tesla meeting targets to boost its market value, revive its car business, and advance its robotaxi and Optimus robotics projects. Tesla’s board warned on Tuesday that Musk might leave if the pay deal was rejected. The vote tested traditional corporate governance, with many investors undeterred by the record payout. Tesla’s European sales tumbled in October, data showed on Monday, due to an aging lineup and backlash over Elon Musk’s politics, including his ties to the Trump administration.
- As at Thursday’s close the S&P 500 was 1.75% down for the week.
Local News
- South Africa’s commodity boom is expected to spill into the broader economy, lifting banks, retailers, and property stocks as higher metal prices strengthen the fiscal outlook and support lower interest rates, said Old Mutual Investment Group on Wednesday. Rising precious metal prices have boosted tax receipts and dividends, fuelling consumer spending. The FTSE/JSE All Share Index is heading for its best year since 2009, driven by mining gains. The World Bank on Wednesday forecast that platinum prices will stay high for at least two more years, with a 29% rise expected by the end of 2025 and further gains in 2026 and 2027.
- President Cyril Ramaphosa said on Tuesday that the Government of National Unity (GNU) remains strong after a two-day retreat with political party leaders. He said there is a renewed focus on economic growth, job creation, and lowering living costs. Finance Minister Enoch Godongwana briefed partners ahead of next week’s mini-Budget. Ramaphosa hopes parties like the DA and FF Plus, which withdrew from the National Dialogue earlier this year, may return. He said the GNU is committed to strengthening partnerships and making the dialogue more people-centred.
- Trump questioned South Africa’s place in the Group of 20 ahead of the summit it will host on 22 and 23 November. In a video posted on Truth Social, Trump said South Africa “shouldn’t even be in the G’s anymore, because what’s happened there is bad”. Pretoria is preparing to host G20 leaders later this month, though Trump confirmed he won’t attend, with Vice President JD Vance representing the US. The remarks came as Trump was discussing Cuba and Venezuela, suggesting he may have confused South Africa with South America.
- Gauteng expects a R3.6 billion economic boost from hosting the G20 Summit in Johannesburg, as government and business leaders from the world’s largest economies convene in South Africa for the first time. The province is positioning the event as a catalyst for foreign investment, tourism, and infrastructure development, with recent upgrades to transport, energy, and water systems aimed at enhancing long-term competitiveness. Officials said the summit presents an opportunity to showcase Gauteng’s economic resilience and global connectivity, reinforcing its role as the continent’s financial and commercial hub.
- National Treasury has backed down on plans to tax foreign pensions for South African residents, confirming the exemption will remain for now while it undertakes further consultations. The proposed change was aimed at closing “double non-taxation” gaps in which neither South Africa nor the foreign country taxed retirement income. Treasury deputy-general Chris Axelson said the rule change could still return after consultation. Critics warned tax changes would hit retirees and deter expats from returning.
- Statistics South Africa is facing a severe funding shortfall that threatens the integrity of its national data, just days before the government’s medium-term budget policy statement. With escalating costs, a shrinking operational budget, and high vacancy rates, the agency has warned it may struggle to run key surveys or maintain data quality. The Statistics Council has described the situation as reaching “a crisis point,” and urged Godongwana to address the issue in the upcoming mini-budget, warning that further cuts could compromise economic planning, policymaking, and business confidence.
- Reserve Bank Governor Lesetja Kganyago said over the weekend that a 3% inflation target will support growth, help the poor, and keep fiscal policy prudent. He explained that lower inflation is needed for lower interest rates and noted that high inflation and low rates don’t coexist. He said that, at 6% inflation, cash loses half its value in 12 years, while at 3% it takes 24 years, highlighting the long-term impact of persistent inflation.
- Bank of America (BoA) on Tuesday flagged a potential credit rating upgrade for South Africa, citing stronger growth and falling debt ratios that could see S&P lift its rating in November, provided the GNU remains stable. S&P affirmed the rating in May, noting fiscal challenges but acknowledging the potential for an upgrade if reforms succeed. BoA said 2025 appears stable for the GNU, allowing reforms to continue, as investors adjust to changing US interest rates and the recent resolution of the 2025/26 budget impasse.
- The retail sector is nearing saturation, with 23.4 million m² of shopping centre space across nearly 1,960 malls. Yet, spending is not keeping pace, the latest Absa Merchant Spend Analytics report, released on Monday, showed. Despite consumer pressure, major retailers are expanding. Shoprite plans over 300 new stores in 2026, while Spar aims to open 40 high-end outlets, betting that presence rather than pricing will secure market share. Retailers are also pushing into rural and peri-urban areas, hoping to capture untapped demand and offset slowing growth in cities.
- Vodacom’s out-of-court settlement with Please Call Me inventor Nkosana Makate has reduced the group’s expected interim earnings. The payout could be as high as R748 million, according to preliminary estimates, although Vodacom has not disclosed the amount. Following the settlement, earnings per share are now expected to increase 30% to 40%, with headline earnings per share in the same range. Previously, both metrics were forecast to rise 40% to 45%. Full details will likely be revealed when the company reports its interim results on Monday.
- As at the time of writing, the rand was flat against the dollar, and the ALSI was 0.6% down for the week.
Sources: Dynasty, Reuters, Bloomberg, CNN, BusinessLIVE, Business Report, EWN etc.
