AI bubble is inevitable and unavoidable, says Aswath Damodaran
The valuation expert warned that an artificial intelligence bubble is approaching and could lead to significant market disruption.
Valuation expert Aswath Damodaran stated that an artificial intelligence (AI) bubble is approaching and cannot be entirely avoided, according to a report by The Economic Times. Speaking on the ‘Disruptor Confessions’ podcast, Damodaran noted that the public consciousness regarding AI shifted following the release of ChatGPT by OpenAI on November 30, 2022.
Damodaran said that technology is becoming more momentum-driven and that stock markets have become top-heavy. He observed that the 'Magnificent Seven' companies account for a large portion of the US market value, noting that winner-take-all businesses are capturing trillions of dollars in market capitalisation.
The analyst explained that index funds, such as the S&P 500, contribute to this concentration because they allocate money based on market capitalisation. He compared the current situation to the housing sector before the 2008 financial crisis and the dotcom crash, where major surprises disrupted the market.
Damodaran suggested that if investors are not invested in SpaceX, OpenAI, Anthropic, or the Mag 7, they can avoid the most severe AI-related pain. He warned that when a correction occurs, data centres funded by debt may struggle to generate enough revenue, potentially leading to debt defaults.
Regarding market uncertainty, Damodaran advised against panicking and moving entirely into cash, as this often fails to beat inflation. He said that unless investors need cash for the near term, they should consider staying in the market despite the pain of a correction.
The expert expressed concern that the economic, political, social, and cultural consequences of an AI correction could be more significant than the 2009 blowback.
