The Expanding AI Bubble
Weekly Investment Update | By Brian Schreiner
Narratives of Silicon Valley failure have consistently been proven wrong and today's skepticism about the future of AI profitability may also be shortsighted, but the stakes have never been higher.
The fate of the entire U.S. equity market now rests on the shoulders of the Magnificent 7 and their collective future is almost entirely staked on the success of artificial intelligence.
The “Mag 7” (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla) have a combined market capitalization of over $19 trillion, more than a third of the entire value of the S&P 500. Underpinning this extreme valuation is investors’ belief that these companies hold a significant technological edge over global competition.
U.S.-based AI firms will spend nearly $7 trillion by 2030 on infrastructure and applications, “but with future demand uncertain, investors will need to make calculated decisions,” says McKinsey & Company. This year, large tech firms’ AI spending has been a larger contribution to GDP than all consumer spending.
Venture Capital investors expect their investments to fail about 90% of the time. They expect that one out of ten will be a homerun, but with seed-stage investing, the pay off can take a decade or more. The AI revolution has the backing of both VC investors and the public equity market. The public market doesn’t have the same kind of patience as seasoned VC investors. If the pay off doesn’t come soon, it could get ugly. Not just for the Mag 7, but for the stock market as a whole.
Competition Neglect
A key risk for the Magnificent 7 is competition neglect, where everyone makes the same massive bet at the same time. It's a classic boom-and-bust cycle, seen throughout history. The best examples are overbuilding in railroads, shipping and the internet. All of these bubbles popped after companies rushed to lay new tracks, build new ships and be the next big dot-com. The market flooded, demand was met by a few of the best railroads, shipping companies and internet companies and the rest crashed and burned. Today, the build is data centers, AI infrastructure and applications, driven by the belief that bigger is better.
The Myth of the Moat
Bubbles form and grow on narratives like “AI will change everything.” …“These companies have moats.” …“This is going to happen faster than you can imagine.”
DeepSeek was a shot across the bow of the bigger is better theory. Appearing out of nowhere, it delivered similar performance to the leading U.S. models but was built with a tiny fraction of the resources and on slower computer chips.
DeepSeek is proof that there is no moat when it comes to AI. Microsoft’s CTO, Kevin Scott, emphasizes that AI is a model, not a product. While AI applications like ChatGPT have demonstrated wide adoption, they have yet to generate sustainable revenue streams.
AI’s long-term financial success will depend on its integration into broader digital infrastructure rather than standalone consumer products. Future winners in AI may not be today’s Mag 7 but rather specialized firms that build industry-specific solutions leveraging open-source AI and existing infrastructure.
While the Mag 7 have dominated the tech industry for years, their aggressive AI investments pose massive risks to their business models and their stock prices. AI-driven infrastructure may ultimately benefit newer, specialized companies rather than the incumbent giants.
As history has shown, large-scale technological shifts often favor emerging innovators over established market leaders.
A Better Bet: The Underdogs
Just like the Mag 7 today, 50 years ago, companies like IBM and Xerox seemed to have all the advantages for any coming computer revolution. But it was a bunch of kids like Steve Jobs and Bill Gates, working from their garages who saw what was coming: a personal computer revolution that the mega-cap incumbents simply couldn’t imagine.
As the mega-cap behemoths are engaged in a spending war, the real threats aren’t the established rivals, but their true heirs: the unknown innovators in garages worldwide.
In the 2016 version of The Magnificent Seven, four of the seven heroes are killed in the final confrontation and their bodies are buried on the outskirts of town. α
Interesting things I came across this week…
No Such Thing As Dollar ‘Supply’ and ‘Demand,’ Just Production (Forbes)
Economic Vulnerability Can Foster Revolution (The Felder Report)
The Inflation Trend Is Not Your Friend for the Fed (Apollo)
Lost Art Hunters: Tracking the World’s Missing Masterpieces (YouTube)
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