The current AI investment boom is exhibiting classic signs of a late-stage mania, with record borrowing, circular earnings, soaring valuations, and rising interest rates pointing to a looming reckoning. According to Natale Labia, a partner and chief economist of a global investment firm, the AI investment boom is showing alarming trends. Labia, who writes in his personal capacity, notes that the current trends are reminiscent of past economic bubbles.
The concept of long waves of capitalism, first observed by Soviet economist Nikolai Kondratieff in 1925, suggests that economies experience cycles of boom and bust, typically lasting around 50 years. Kondratieff's theory was later built upon by economist Joseph Schumpeter, who coined the phrase "creative destruction" to describe the process of innovation-driven economic transformation. Schumpeter argued that each long wave is driven by a cluster of innovations that reorganize the entire economy.
Economist Carlota Perez subsequently explained that each technological revolution passes through two critical phases: the "installation" phase, where speculative finance pours capital into new infrastructure, and the "deployment" phase, where new technology is put to productive use. Perez argued that the financial crash is not an accident, but a fundamental mechanism through which speculative capital hands the baton to productive capital. This framework provides a useful lens through which to view the current AI investment boom.
The numbers suggest that we are nearing the end of the installation phase of AI mania. Combined AI-related capital expenditure by major AI hyperscalers has roughly doubled, from around $450-500 billion last year to close to $1 trillion in 2026, according to Bloomberg data. However, this spending spree is not being funded by profits and cash flow; instead, companies are borrowing record sums to build capacity for revenue and demand that does not yet exist.
The circularity of earnings growth is also a cause for concern. Much of the earnings growth on one side of the income statement is simply another company's capital expenditure, often funded by equity investment or lending from vendor companies themselves. This creates a precarious situation, where the earnings bubble could burst if the eventual revenue does not materialize. The recent wave of IPOs and share sales is also a warning sign that we have reached the peak of the AI investment boom.
The macroeconomic context is also suggestive of a late-cycle dynamic. The US Federal Reserve has raised its benchmark rate by 25 basis points to 3.75-4%, citing a strong labor market, stubborn inflation, and the continuing energy shock from the Iran war. The market is now pricing in one more hike this year, and the ECB has already started raising rates. The US 10-year bond yield is firmly above 5%, its highest level since 2002, while oil prices are well above $100 and showing no signs of retreating.
The precedent for the current situation is uncomfortable. Between June 1999 and May 2000, the Fed hiked rates from 4.75% to 6.5%, after which the S&P 500 lost half its value in roughly two-and-a-half years. The transmission mechanism is straightforward: capex funded by debt at rising rates, against cash flows turning negative, is capex that gets axed. On this reading, one might expect the S&P 500 to start cracking next year, and ultimately to fall between 30-50% from its highs.
Key points
- The AI investment boom shows classic signs of a late-stage mania, with record borrowing, circular earnings, and soaring valuations.
- The current trends are reminiscent of past economic bubbles, such as the dot-com bust of 2000.
- The macroeconomic context suggests a late-cycle dynamic, with rising interest rates and a strong labor market.
