The wave of AI sell-off ignites a “bubble” of anxiety among professional investors Oak Capital Max extinguishes the fire: it has not reached the point where it is “completely unaware”

The Zhitong Finance App learned that as AI trading pushes the Nasdaq 100 Index to new highs, more and more professional investors such as Dario and Novogratz warned that the stock market is approaching a bubble. Last week, the NASDAQ index fell 5.5% to further amplify anxiety. However, Howard Marx, co-chairman of Oak Capital, believes that the core conditions of the bubble have not yet been met: the expected price-earnings ratio is not extremely inflated. Investors continue to discuss the bubble itself, which shows that they are not completely unaware of the risks, and that there are mixed signals of market sentiment and reckless behavior.

Hedge fund giants such as Ray Dario and Michael Novogratz, and many lesser-known market observers are increasingly convinced that AI trading is pushing the stock market to the edge of a bubble.

The Nasdaq 100 Index once again hit a new high earlier this month. Every time the index reached a new all-time high, the frequency of the term “internet bubble” in the news soared. All this anxiety may help explain the wave of sell-offs experienced by the market last week. The index fell 5.5% in a week.

However, if this were a real bubble, Wall Street investors would also find it increasingly difficult to define.

Judging from the simplest price-earnings ratio index, unlike the price-earnings ratio that expanded to a clearly inflated level during the Internet bubble a quarter of a century ago, the expected price-earnings ratio of benchmark indices such as the S&P 500 and Nasdaq 100 actually declined this year because the market expected corporate profits to explode. In fact, in the month before the market peaked in 2000, the five largest technology stocks in the S&P 500 had an average expected price-earnings ratio of about 65 times, while today the five largest technology stocks are only about 23 times.

So what is it that makes so many people smell the bubble? And if they make the right judgement, what conditions are needed to pierce the bubble? Market professionals have pointed to a variety of bubble signs — from high debt levels and unsustainable profit growth expectations to historical bubble patterns based on “feeling.”

“If we were to pick out the core elements of a bubble, it might be that the bubble evolved into a public frenzy, a kind of obsession, where some people made a lot of money, and anyone who failed to participate felt extremely foolish and very sorry,” said Howard Marx, co-chairman of Oak Capital Management.

Max has accurately predicted the top of the internet bubble, and last year he warned that he was “keeping a close eye on the bubble.” He said that the term “bubble” is “vague,” but it usually requires that the market be quantifiable to reach a level that is contrary to investors' judgments, while risk taking and sentiment are also out of touch with reality.

“The bubble is irrational prosperity; it is recklessly aggressive,” he said in a telephone interview. “'Unknown' is another appropriate word.”

When analyzing his current preferred bubble indicators, Max doesn't think we're already in a bubble. Although investors have shown typical “fear of missing out” — fear of missing out on further increases in tech stocks, ongoing bubble comparison discussions mean they aren't completely unaware of the risks. As for the other sign — investors' recklessness — the signal was equally mixed. At current levels, the traditional price-earnings ratio doesn't look like a bubble, although the multiples are indeed alarming when calculated using profits over the past ten years as a benchmark.

Investors' reckless aggressiveness

On the technical side, traders have noticed similarities between current trends and stock market crashes after the bursting of previous bubbles. The indicators they cited include extreme momentum during record periods of stock and bond issuance. Other worrying data include the huge differentiation between the best and worst performing individual stocks in the sector, and the lack of market breadth.

According to Michael O'Rourke, chief market strategist at JonesTrading Institutional Services, the decline in the price-earnings ratio of large tech stocks is reasonable because these companies are burdened with huge debts to build AI infrastructure. He pointed out that when companies aggressively increase leverage, the valuation multiples will be compressed, which is particularly worrying given the circular nature of investments.

“We've taken supplier financing to a new level” — chipmakers themselves need to subsidize the purchase of their products, “otherwise these purchases wouldn't have happened,” O'Rourke said in an interview.

Another indicator that has alarmed some investors is the cyclically adjusted price-earnings ratio (CAPE), which is the ratio of stock prices to inflation-adjusted profits over the past ten years. This indicator is often called “Schiller's price-earnings ratio,” named after Yale University economist Robert Schiller, who published the book “Irrational Prosperity” in March 2000 when the market peaked.

Nicolas Colas, co-founder of DataTrek Research, called the indicator “the most frightening valuation chart currently circulating.” Currently, this multiple is about 41 times, which is only slightly lower than the 44 times record set in 1999.

Another area of concern is extreme concentration at the top of the stock market. Today, Nvidia, Apple, and Microsoft — the three largest companies by market capitalization in the US — together account for about 21% of the S&P 500 index; in October 1999, it took nearly 10 stocks to reach that ratio.

Despite this, the NASDAQ 100's excess performance over the past decade compared to the S&P 500 by 250 percentage points is hard to ignore, even with all these technical warnings.

“Even if you have some concerns about tech stocks, you can't let go of it. It almost seems foolish to give it up because it always outperforms,” said Jim Paulson, an investment veteran and current newsletter writer.

fanatical enthusiasm

One important item on the list of many bubble watchers is investor sentiment — and this year, whether at the institutional or retail level, the sentiment is far from fanatical. High inflation, the uncertainty of the midterm elections, and the war with Iran caused traders to take defensive positions at various points in 2026. The Nasdaq 100 index experienced multiple pullbacks and a complete 10% correction.

Despite this, there are signs that investors are excited about the market opportunities brought about by the AI revolution, including company name changes to boost share price returns. Even the head of one of the biggest beneficiaries of this round of prosperity publicly pointed out this fanatical atmosphere. Broadcom CEO Chen Fuyang said that the AI boom has attracted investors who “don't even know what they are investing in” and that they act like they are in a casino.

Another commonly cited warning sign of the bubble, at least on an anecdotal level, is that they actually discussed investment topics in casual conversations with service industry practitioners. Joseph Kennedy famously said: In 1929, when all his shoeshine kids were offering stock suggestions, he knew it was time to sell.

CFRA Chief Investment Strategist Sam Stowall recently experienced a similar situation. He said that while talking with a newsstand operator in New York, the other party asked him to print stock reports for AI-related companies such as Intel and Cisco Systems.

oblivious

Regardless of which warning signs the market is watching, as the current bull market enters its fifth year, Wall Street bubble discussions are becoming more and more common. According to data compiled by the market, during the second quarter earnings season, business executives and analysts discussed analogies between the 2008 global financial crisis and the tech bubble in 15 different investor conferences, including Goldman Sachs, Adderall Semiconductor, and Blackstone Group.

Meanwhile, interest rates have soared to levels that could be a problem for former market darlings. CoreWeave's stock price almost doubled between January and early May, then last week's sharp decline turned negative gains during the year, and its bond yields also climbed.

“Normally, it is a problem in the credit market that ends the cycle,” said Brian Reynolds, chief market strategist at Reynolds Strategy LLC. “The real trouble begins when people encounter additional security deposit requirements that cannot be met in the credit market.”

The bubble will also burst when the belief that “technology can change the world” turns into extreme stock market frenzy. Investors “become overconfident and then pay too high prices. This is the essence of bubble thinking. The problem isn't that AI won't change the world,” JonestTrading's O'Rourke said.

In previous cases — including the rise of the internet — technology was hugely successful and transformative, and the rise in the stock market brought about a surge in stock supply through IPOs and additional stock issuance. But when profits were disappointing and interest rates rose, concentrated gains began to reverse.

However, Max has not yet detected a key bubble signal in the market — investors are “completely unaware” of risk. In fact, it seems like everyone on Wall Street is talking about a possible bubble.

“If enough people are carefully wondering if there is a bubble in a certain field, then it is perfectly reasonable to assume that if it is indeed a bubble, then it is probably still restrained,” Max said.