Tech companies are running hot, with Wall Street investors sustaining multi-trillion dollar valuations despite subdued earnings. Companies heavily invested in AI are particularly challenged on that front, thanks to heavy data center spending that isn’t yet — and may ever — result in sizable profits.
The gap between those companies’ valuations and their ability to actually make money continues to grow at a breakneck pace, terrifying analysts. The S&P is up a whopping nine percent so far this year, wrapping up its best quarter since 2020 at the end of last month, as Fortune reports.
But what comes up must come down. In a Tuesday note, Bank of America warned that “speculation is hitting extreme levels as high multiple stocks have gapped up demonstrably, an event that has historically preceded a valuation ‘snapback.'”
In other words, Wall Street could be in for a nasty reality check.
Meanwhile, experts warn that the US economy could be in an even worse shape than right before the Great Depression of the late 1920s. As the Telegraph‘s economics columnist Russ Mould pointed out, US stocks are currently priced on average 41 times their average earnings over the last decade, an indicator called the Shiller CAPE ratio. To put that number into perspective, the ratio was just 32.5 on Black Tuesday, the day of the worst financial disaster in modern history almost 100 years ago.
The fretting comes after some major turbulence. A major sell-off rocked the S&P 500 towards the end of June, wiping out hundreds of billions of dollars in market value. Even Musk’s SpaceX, which had gone public mere weeks earlier and is now top-heavy with AI spending itself, was caught up in the downturn, plummeting back down to its starting price of $150.
International markets have also seen massive swings, particularly in Asia, which could indicate troubling days ahead.
“This volatility is, in our view, evidence of excessive froth and calls into the question the sustainability of this rally,” Capital Economics analysts told Fortune.
Expect turbulence. For the time being, many investors are as optimistic as ever. Just this week, SpaceX received extremely bullish ratings from Morgan Stanley and Goldman Sachs, with price targets of $300 — twice the space company’s current share price — and $205, respectively.
More on the AI bubble: There’s an Urgent Sign of an Impending Market Collapse