Jeremy Grantham, a renowned investor with a track record of identifying stock market bubbles, has issued a stark warning regarding the current valuations of artificial intelligence (AI) firms. Speaking on the MoneyWeek Talks podcast, Grantham suggested that historians a century from now might view this period similarly to the South Sea Bubble, one of history's most significant financial crashes. His concerns centre on what he perceives as unsustainable projections and excessive capital flowing into the AI sector.
Grantham pointed to examples such as SpaceX's prospectus, which he described as 'unbelievable', citing projections for colossal revenue streams, with 90% seemingly reliant on AI. He questioned the viability of these forecasts, particularly given the company's current substantial losses and the competitive landscape within AI development. This, he argues, reflects an 'act of faith' reminiscent of past speculative manias.
While acknowledging the transformative potential of AI, Grantham cautioned that even revolutionary technologies can lead to market busts if overcapitalised. He drew a parallel with the 19th-century railroad boom, which, despite its immense productivity gains and life-altering impact, saw a significant market crash due to excessive investment. Grantham stated that 'the more obvious and important the idea, the more likely you are to attract too much capital and have a market bust,' predicting a similar fate for AI.
Furthermore, Grantham analysed the dynamics among the 'Magnificent Seven' technology giants. He observed that while these companies previously operated as distinct monopolies in their respective fields, they are now converging on a singular goal: AI dominance. This shift, he believes, will trigger an intense and costly battle. These firms are reportedly prioritising spending vast cash flows on AI development, leading to a 'gorilla fest' where they 'fight to the death'.
This aggressive competition, Grantham argued, is unlikely to generate substantial profits in the short term and could lead to significant stock corrections. He predicted that 'in that sort of fight, they do not make lots of money and the stocks get crushed.' However, he also suggested that, like the internet and railroad industries before it, the AI sector would eventually 'rise from the ashes' after an initial period of market turmoil.