Market Mania: Smead Warns of AI Stock Bubble Bursting

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September 30, 2025

A prominent fund manager is issuing cautionary signals regarding the current surge in Artificial Intelligence (AI) stocks, suggesting the market is exhibiting characteristics reminiscent of a speculative bubble. Bill Smead, Founder and Chief investment Officer of Smead Capital Management, articulated concerns about the rapid and substantial increases in valuations of companies like Nvidia and Palantir, comparing the present situation to the height of the dot-com boom just before its dramatic collapse.

Surging valuations Fuel concerns

Nvidia, a leading manufacturer of AI chips, has experienced a remarkable twelve-fold increase in its stock price since the beginning of 2023, propelling its market capitalization to an unprecedented $4.4 trillion.Simultaneously, Palantir, specializing in AI-powered data analysis, has seen its shares soar twenty-eight-fold, resulting in a valuation of approximately $420 billion. These astronomical gains have prompted questions about whether current stock prices are justified by underlying fundamentals.

The CoreWeave Case Study

Smead pointed to CoreWeave, an AI cloud-computing firm, as a prime illustration of the current market exuberance. Despite generating $1.2 billion in revenue last quarter and possessing a $30 billion revenue backlog linked to an expanded partnership with OpenAI, CoreWeave’s market valuation has reached $60 billion. This disparity between revenue and market capitalization is raising eyebrows among seasoned investors.

Echoes of the Past: Late 1999 Revisited

The current market dynamic is strikingly similar to the conditions that prevailed in late 1999, just prior to the bursting of the dot-com bubble, according to Smead. He argues that the existing situation mirrors past market manias, observing a pattern of escalating speculation and overcapitalization. He believes that current AI company success has already been heavily factored into stock prices, leading to a perhaps unsustainable situation.

Recent market activity underscores this volatility. oracle’s stock jumped 40% in a single day following a positive revenue forecast driven by demand from AI companies like openai. Though, Smead cautions that such rapid gains can be just as quickly reversed, potentially leading to significant losses for investors.

A Cautionary Note on Interconnectedness

smead also expressed apprehension regarding the increasingly close relationships between major players in the AI industry. Nvidia’s recent commitment to invest up to $100 billion in OpenAI, to support the expansion of AI data centers reliant on Nvidia’s chips, exemplifies this interconnectedness, and raises concerns about potential risks.

Company	Stock Price Increase (As Early 2023)	Current Market Capitalization
Nvidia	12-Fold	$4.4 Trillion
Palantir	28-Fold	$420 Billion
CoreWeave	N/A	$60 Billion (Valuation)

Did You Know? The Nasdaq Composite Index, a key indicator of the tech sector, experienced a 78% decline between March 2000 and October 2002 during the dot-com bubble burst.

Pro Tip: Diversifying your investment portfolio across various sectors can help mitigate risk during periods of market volatility.

While acknowledging the potential of AI technology,Smead’s primary concern isn’t the technology itself,but rather the inflated valuations. He believes that a market correction is increasingly likely, and warns that when it occurs, investors may only be willing to purchase AI stocks at significantly lower prices.

Smead’s fund is currently positioned defensively, favoring investments in sectors such as energy, homebuilding, healthcare, retail, and real estate investment trusts (REITs). He suggests a focus on “meritorious companies in out-of-favor sectors.”

Understanding Market Bubbles

Market bubbles are characterized by a rapid escalation of asset prices,driven by speculative exuberance rather than underlying fundamentals. These bubbles inevitably burst, resulting in substantial losses for investors. Identifying the signs of a bubble – such as extreme valuations, excessive media hype, and a disconnect between price and intrinsic value – is crucial for informed investment decisions. The cyclical nature of market bubbles highlights the importance of long-term investment strategies and risk management.

Frequently Asked Questions About AI Stock Valuations

• What is an AI stock bubble? An AI stock bubble refers to a period of excessively inflated stock prices in companies related to Artificial Intelligence, detached from their actual financial performance.
• is the current AI market a bubble? Some analysts, like Bill Smead, believe the current AI market exhibits characteristics of a bubble due to rapidly increasing valuations.
• What happened during the dot-com bubble? The dot-com bubble saw massive investment in internet-based companies in the late 1990s, followed by a dramatic crash in 2000.
• How can investors protect themselves from a potential AI stock crash? Diversifying investments and focusing on companies with strong financial fundamentals are crucial strategies.
• What is Nvidia’s role in the current AI boom? Nvidia is a leading manufacturer of AI chips, and its stock has benefited significantly from the increasing demand for AI technology.

What are your thoughts on the current AI stock market? Do you believe a correction is imminent?

Share your perspective and join the conversation in the comments below!

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What specific financial metrics should investors prioritize when evaluating AI companies to avoid overvaluation?

the Rising Concerns Around AI Stock Valuations

Smead Capital management,a value investing firm with a long track record,is sounding the alarm on a potential AI stock bubble. CEO Bill Smead recently warned investors that the current fervor surrounding artificial intelligence investments resembles the dot-com boom of the late 1990s, suggesting a significant correction could be on the horizon. This isn't a dismissal of AI's long-term potential, but a critical assessment of current market valuations and investor sentiment. the core argument centers on the disconnect between inflated stock prices and underlying business fundamentals.

identifying the Characteristics of a Bubble

Several key indicators suggest we may be entering bubble territory, particularly within the tech sector and specifically concerning AI companies:

* Rapid Price Appreciation: Many AI-related stocks have experienced exponential growth in a short period, far outpacing revenue growth.

* Narrative-Driven Investing: Investment decisions are increasingly based on the potential of AI rather than concrete financial performance. The "AI" label itself is becoming a primary driver of stock prices, irrespective of the company's actual AI integration.

* Ignoring Traditional Valuation Metrics: Price-to-earnings (P/E) ratios, price-to-sales (P/S) ratios, and other standard valuation metrics are being disregarded in favor of speculative growth projections.

* Increased Retail Investor Participation: A surge in individual investors, ofen driven by social media hype, is contributing to the inflated demand.

* Concentration of Gains: A small number of companies - frequently enough the "Magnificent Seven" - are capturing the majority of the market gains,indicating a lack of broad-based participation.

The Dot-com Parallels: A Cautionary Tale

The late 1990s dot-com bubble provides a stark warning. Companies with little more than a website and a business plan attracted massive investment, leading to unsustainable valuations. When the bubble burst,many of these companies went bankrupt,and investors suffered significant losses. Smead argues that the current AI investment landscape shares several similarities:

1. Over-Optimistic Projections: Just as with the internet in the 90s, the potential of AI is being wildly overestimated in the short term.
2. Lack of Profitability: Many AI companies are prioritizing growth over profitability, burning through cash with little prospect of near-term returns.
3. Speculative Mania: A "get rich rapid" mentality is driving investment decisions, fueled by media hype and social media trends.

Which AI Stocks Are Most Vulnerable?

While Smead doesn't name specific companies, the warning implicitly targets those with:

* High Valuations with Limited Revenue: Companies trading at extremely high multiples of sales or earnings are particularly vulnerable.

* Unproven Business Models: AI startups with unproven technologies or unclear paths to profitability face significant risk.

* Dependence on Hype: Companies whose stock prices are primarily driven by the "AI" narrative, rather than fundamental performance.

* Limited Competitive Advantage: AI is becoming increasingly commoditized. Companies without a enduring competitive advantage will struggle to maintain their valuations.

The Impact on Broader Markets & Investment Strategies

A bursting AI bubble wouldn't be contained to the tech sector. It could trigger a broader market correction, impacting investors across all asset classes. Here's how investors should consider adjusting their strategies:

* Focus on Value Investing: Prioritize companies with strong fundamentals, consistent profitability, and reasonable valuations.

* Diversify Your Portfolio: Don't put all your eggs in one basket. Diversification across sectors and asset classes can help mitigate risk.

* long-Term Viewpoint: Avoid short-term speculation and focus on long-term investment goals.

* Due Diligence: Thoroughly research any investment before committing capital. Understand the company's business model,financial performance,and competitive landscape.

* Consider Defensive Stocks: In times of market uncertainty, defensive stocks (e.g.,consumer staples,healthcare) tend to outperform.

real-World Examples & Historical Context

The history of technological innovation is littered with bubbles. The South Sea Bubble of the 18th century, the railroad mania of the 19th century, and the dot-com bubble of the late 20th century all demonstrate the dangers of