❓WHAT HAPPENED: Stocks and other investments like Bitcoin have seen significant volatility in recent days as fears over an artificial intelligence (AI) industry-fueled economic bubble mount.

👤WHO WAS INVOLVED: Nvidia, former Facebook executive Julie Zhou, the Bank of England, the AI industry, institutional investors, retail investors, and major stock indexes like the Dow Jones, the Nasdaq, and the S&P 500.

📍WHEN & WHERE: The fears of a bubble have been mounting for months, though Wednesday’s earnings report from Nvidia could prove a critical moment.

🎯IMPACT: The current loss in market index value is being driven primarily by institutional investors who have begun to fear that the AI sector and those tied to it are caught in an economic bubble with the potential to cause a 2008 or DotCom-style crash when it bursts.

Stocks and other investments, such as Bitcoin, have seen significant volatility in recent days as fears over an artificial intelligence (AI)- fueled economic bubble mount. However, this isn’t the full story behind the declining market returns, as a broader issue of asset inflation and a long-anticipated cryptocurrency correction also contribute to the market slide.

While the Dow Jones, Nasdaq, and S&P 500 remain near all-time highs for the year, all three indexes have lost some ground since Monday, with the Dow losing over 400 points on Tuesday. The loss in value is being driven primarily by institutional investors—think major funds, banks, and billionaires—who have begun to fear that the AI sector and those tied to it are caught in an economic bubble with the potential to cause a 2008 or DotCom-style crash when it bursts.

THE NVIDIA PROBLEM.

The possibility of a bubble in the AI industry is a topic of hot debate. Notably, the primary concern centers on chip-maker Nvidia and its sales and market ecosystem. From a 30,000-foot view, it often appears as though Nvidia is essentially selling its products—by and large—to itself.

This fear over Nvidia and whether its meteoric rise and returns are real has underpinned some of the market chaos. The company will release its earnings report today after the market close, with the report itself expected between 4:20 PM and 4:30 PM. Executives will address shareholders at 5:00 PM.

Currently, there is little concrete evidence to suggest that Nvidia will miss its earnings expectations. However, the remote possibility and potential economic impact of Nvidia missing its earnings have spooked large swaths of the market. This is because Nvidia comprises somewhere between five percent and 10 percent of the S&P 500, and the AI industry overall comprises an even larger chunk of the index. A single stock index having so much exposure to one industry and one company has raised serious concerns about just what happens when that company and/or industry stumbles.

IS THERE AN AI BUBBLE?

Maybe.

The Bank of England has warned that an AI sector-fueled bubble is increasingly likely and could trigger a “sudden correction” in global financial markets. “The risk of a sharp market correction has increased,” said the Bank of England’s financial policy committee during a September meeting, warning that “equity market valuations appear stretched, particularly for technology companies focused on artificial intelligence.”

Additionally, former Facebook executive Julie Zhou believes that much of the AI industry’s growth is not being driven by robust data-driven business strategies, but rather by “good instincts and good vibes.” Zhou argues that while the AI industry holds tremendous promise, the technology is still far from achieving what many of its adherents claim. This has left the AI technology sector rife with speculative investment on a scale that could potentially threaten the U.S. economy should the bubble burst.

Adding to the concern are rumors that influential market figures, such as Dr. Michael Burry—famous for having shorted the housing market ahead of its 2008 collapse—have taken similar positions on Nvidia and the broader AI sector. Still, strong earnings from Nvidia and other companies tied to the AI industry would likely assuage investor fears and suggest that fears of a bubble may be overblown.

WHY IS BITCOIN SLIDING THEN? 

The fall of Bitcoin is a bit more complicated but still tied to the broader bubble fears currently among institutional investors. When market volatility increases, investors tend to flock to safe-haven investments—think Treasuries or very stable currencies like the Japanese yen. While many retail investors consider Bitcoin a safe haven, institutional investors view it as having too much exposure and a risk in a bubble situation.

Hence, the bubble fears are also impacting Bitcoin, along with other market correction forces. Some consider the cryptocurrency to be severely overvalued and thus a bubble in its own right. Conversely, JP Morgan has a price target of $170,000 on BTC within six to twelve months, leading some to “buy the dip” currently.

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