The AI bubble could be worse than the dot-com bust [View all]

https://thehill.com/opinion/finance/5925202-tech-bubble-ai-driven-growth/

However, extrapolating from recent robust growth in semiconductor and memory chip revenues and expecting sustained long-term outperformance is risky, as it relies on the uncertain assumption that the current boom in AI infrastructure spending will continue unabated. Major hyperscalers are already resorting to additional debt and equity financing to support their elevated capital expenditures, since even their substantial free cash flow is becoming insufficient to fund the escalating investments needed for AI infrastructure.
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If the AI bubble bursts, the economic fallout could be far more damaging than the dot-com crash. The U.S. economy is in a weaker position today, with growth increasingly dependent on high-income consumers, a trend highlighted by a recent New York Fed study. At the same time, substantial AI-related capital expenditures have become an important driver of recent U.S. GDP growth, raising the risk that any sharp pullback in investment could have broader economic repercussions.

Unlike today’s unbalanced economy, the late-1990s expansion was supported by stronger overall economic performance. Real GDP increased by more than 4 percent annually from 1997 to 2000, and the resultant prosperity was widely shared.

Furthermore, in contrast to the 1998 to 2001 period, when the federal government posted budget surpluses for four years in a row, the U.S. has experienced large deficits since 2020. Federal debt has climbed to more than 120 percent of GDP, compared with 54.5 percent in 2001. Such historically high levels of public debt create significant financial risks. If the benchmark bond yield rises above 5 percent, it could trigger a sharp repricing of risky assets and deflate the AI bubble.