When sitting down to write this article, I felt it was only fair to get AI’s opinion on the matter. I asked google, “What is the definition of a stock market bubble?”
Google’s AI overview returned: “A stock market bubble is a rapid, unsustainable run-up in stock prices where asset values significantly exceed their fundamental, intrinsic worth, driven by speculation and euphoria rather than business fundamentals like earnings or growth. When the bubble ‘bursts’, prices fall quickly, leading to a panic and potentially a crash”.
When objectively assessing the statistics of AI stocks over the past year, this is exactly what we see.
Take NVIDIA, for example. On October 29th, the company became the first in history to reach a market cap of $5 trillion dollars, rising over 50% from its recent April low. Whether that rapid run-up is unsustainable is impossible to know, however the markets’ valuation certainly exceeds NVIDIA’s current fundamental worth. The stock currently has a price-to-sale ratio of 28.19, and is valued at over 45x the value of its net assets.
To put that into context, the next five most valuable companies after NVIDIA have an average price-to-sale ratio of 8.73, and an average price-to-book ratio of 21.11.
*Data Courtesy of Yahoo Finance*
| Company | Market Cap | Price/Sales | Price/Book |
| NVIDIA | 4.60T | 28.19 | 45.93 |
| Apple | 3.82T | 9.50 | 57.97 |
| Microsoft | 3.83T | 13.67 | 11.16 |
| Alphabet (Google) | 2.98T | 8.17 | 8.21 |
| Amazon | 2.37T | 3.58 | 7.11 |
It isn’t just NVIDIA. In October, The Financial Times reported that 10 pre-profit AI startups receiving copious amounts of private investment had seen their combined valuations soar over $1 trillion. While most of those startups are private, the shares of tech companies like NVIDIA, AMD, and Oracle have skyrocketed off of the hype produced by their deals with these private AI companies.
The sky-high prices of these stocks are predicated on both these startups’ ability to pay and their continued rapid growth, as the growth of chip suppliers like NVIDIA and AMD relies on the growth of the AI startups, their customers.
The market is betting on the absolute best-case scenario: rapid expansion of AI capabilities, and rapid and extremely widespread AI integration. With expectations being so high, stock pullback could happen even if AI, hardware, and software companies report positive results, as the market is expecting extremely positive results.
This effect has started to be seen, with Palantir’s recent earnings pullback despite reporting positive results.
Palantir has hard-to-believe valuation statistics. As of writing, the company has a price/sales ratio of 137.33, and a price/book ratio of 74.84, and that is after its recent pullback.
The pullback was also likely driven by the increasing amount of industry experts and CEOs speaking out about the growing bubble. Recently, Goldman Sachs CEO David Solomon warned that a “drawdown” would follow the AI boom, and Michael Burry, famed for predicting the 2008 financial crash, has taken massive bets against Palantir and NVIDIA.
The effects of the bubble bursting would affect the entire market, not just the AI sector. The S&P 500 has continued to march upward over the past year despite trade turmoil and tariffs likely due to the influence of a small number of major tech players. A pullback across that sector would be mirrored in the S&P, effecting the most fundamental position in many people’s retirement savings.
