Howard Marks
I have lived through several bubbles and read about others. One might think the losses experienced when past bubbles popped would discourage the next one from forming.
But that has not happened yet, and I am sure it never will. Memories are short, and prudence and natural risk aversion are no match for the dream of getting rich on the back of a revolutionary technology that “everyone knows” will change the world. The key thing to note here is that the new thing understandably inspires great enthusiasm, but bubbles are what happen when enthusiasm reaches irrational proportions.
During visits to clients in Asia and the Middle East last month, I was often asked about the possibility of a bubble surrounding artificial intelligence. I’m no techie, nor an expert in the stock market, but I’ve done my best to rationally assess this topic.
First, I want to acknowledge the rapid advancement that can be caused by certain bubbles. As shown by the research of Byrne Hobart and Tobias Huber, investors pour money into a revolutionary area of opportunity, accelerating its progress. Some capital goes into life-changing investments in the winners, but a lot of it will be incinerated. Of course, the key is to not be one of the investors whose wealth is destroyed in the process.
So, what do we know? Well, I haven’t met anyone who doesn’t believe AI has the potential to be one of the biggest technological developments of all time, reshaping both daily life and the global economy. We also know that in recent years, markets and economies have become increasingly dependent on it, with AI stocks driving most of the S&P 500’s gains and capital expenditure on industry capacity propping up US GDP growth.
Given the growth of demand for AI, which seems totally unpredictable, there can be no doubt that today’s behaviour is “speculative”. At the extremes, exuberance is exemplified by AI start-ups raising $1bn in “seed rounds” of funding, sometimes despite having no clear product!
While the parallels with past bubbles are inescapable, believers in the technology will argue that “this time it’s different”. Those four words are heard in virtually every bubble, claiming that the current situation isn’t a bubble, unlike the analogous earlier ones. On the other hand, Sir John Templeton, who first drew my attention to those four words, was quick to point out that 20 per cent of the time things really are different.
The supporters have reasons why the comparison to earlier bubbles isn’t appropriate. They include the fact that unlike the internet/ecommerce bubble, AI products already exist, the demand for them is exploding and they’re producing revenues in rapidly increasing amounts. They also include the fact that valuation ratios such as price-earnings multiples are reasonable for the established participants: for example, Nvidia, the AI poster child, has a forward p/e ratio of about 30. That’s high but not crazy for an exceptional company capable of generating immense earnings, and certainly much less than some telecoms, media and technology stocks were trading at in the dotcom boom in 1999.
The sceptics, on the other hand, readily cite ways in which today’s events are comparable to the internet bubble. Most importantly, they include a lack of clarity regarding the ultimate source of profits from the AI boom and who will receive them. Hundreds of billions of dollars are being committed to the race for AI leadership. Yet we don’t know who will win, nor what the result will be.
To date, much of the investment in AI has consisted of equity capital derived from operating cash flow. But now, the winner-takes-all arms race in AI is requiring some companies to take on debt. Debt is neither a good thing nor a bad thing per se. It all comes down to the proportion of debt in the capital structure, the quality of the assets or cash flows you’re lending against, borrowers’ alternative sources of liquidity for repayment, and the adequacy of the safety margin obtained by lenders. We’ll see which lenders maintain discipline in today’s heady environment.
Given the vast potential of AI but also the large number of enormous unknowns, virtually no one can say for sure whether investors are behaving irrationally. I’d therefore advise no one to go all in without acknowledging that they face the risk of ruin if things go badly. But by the same token, no one should stay all out and risk missing out on one of the great technological steps forward. A moderate position, applied with selectivity and prudence, seems like the best approach.
The writer is co-founder and co-chair of Oaktree Capital Management and author of “Mastering the Market Cycle: Getting the Odds on Your Side.”
This article by Howard Marks was published in the Financial Times on 9 December 2025.