America’s stock market, unconcerned by trade tensions or fiscal strain, sits near a record high. The exuberance is driven by a new generation of techno-optimism—this time, about artificial intelligence (AI). The 'Magnificent Seven' (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) now account for roughly 38% of the S&P 500’s market-capitalisation and about half of its profits. Their dominance, and the feverish faith in a new technology revolution, evoke memories of the late-1990s dotcom mania.
The S&P’s cyclically adjusted price-earnings ratio (P/E) has breached 40 for the first time since 2000, when it reached 44—shortly before the benchmark plunged by nearly half, as the internet bubble burst. Then, as now, the conviction that a digital revolution would rewrite the rules justified almost any valuation. Then, as now, the danger is that when the music stops, the fall will be sudden, faster and deeper than anyone expects.
Writing for The Economist magazine, Gita Gopinath, until recently, the first deputy managing director of the IMF (International Monetary Fund), calculates that a dotcom-like market crash could wipe out over US$20trn (trillion) in wealth for American households, equivalent to roughly 70% of American GDP in 2024. The global fallout would be wealth losses exceeding $15trn, or about 20% of the rest of the world’s GDP. Her argument has sent investors into an uneasy debate.
Unfortunately, Ms Gopinath skips over the likely causes behind a possible crash. She focuses on how a crisis, this time, cannot be cushioned by a resilient dollar or a government-led rescue through tax cuts or spending splurges— Washington’s toolkit looks empty today. So, is a dotcom-like crash likely and why? The likeliest sources of trouble lie in four corners of the financial system: incestuous investment loops within the AI ecosystem; the ballooning, barely regulated private-credit market; soaring public debt; and speculative froth in cryptocurrencies and private equity. The first two are especially alarming.
Incestuous Intelligence
Consider how incestuous relationships across the sector have helped push up valuations. Microsoft has invested at least US$13bn (billion) in OpenAI, which uses Microsoft’s Azure cloud infrastructure. Thus, Microsoft is simultaneously investor, infrastructure-provider, platform/host and commercial partner (and potentially a competitor).
Amazon has committed US$8bn to Anthropic which uses Amazon’s AWS cloud infrastructure. Amazon integrates or plans to integrate Anthropic’s Claude models into its products (for example, Alexa). So Amazon is investor, cloud-host/partner and user/integrator of the start-tup’s AI models. Again: investor + supplier + customer.
Nvidia, the dominant AI hardware supplier, will invest up to US$100bn in OpenAI which will buy Nvidia systems. Nvidia has also invested in Elon Musk's AI startup xAI and will supply processors for xAI data centres.
The web of mutual dependence grows denser still. CoreWeave, a cloud-infrastructure-provider is a major Nvidia customer and Nvidia has guaranteed US$6.3bn to the purchase of CoreWeave’s unused capacity through 2032. Nvidia’s rival Advanced Micro Devices (AMD) announced a supplier-investment deal with OpenAI.
Meanwhile, OpenAI has signed a five-year, US$300bn contract with Oracle Cloud (beginning in 2027) and a US$22.4bn deal with CoreWeave, including a US$350mn (million) in CoreWeave stock, meaning OpenAI is simultaneously customer (contracting for GPU infrastructure) and investor/shareholder in the infrastructure-provider. CoreWeave also announced plans to work with Meta, creating further inter-dependencies.
This circular financing inflates revenues and valuations of the priciest part of the stock market. CoreWeave’s valuation jumped from US$19bn to US$23bn in 2025, citing OpenAI contracts and Nvidia’s backstop.
Incredibly, companies are booking these deals as revenues and lifting their market valuation. Those multiples spill over and are used to justify higher values for other AI startups. Since there is no chance of the AI boom delivering profits on trillions of dollars of interlocking investments, it is a bubble that can burst.
Torsten Slok of Apollo, a private investment firm, has noted that AI stocks are more richly valued than dotcom stocks in 1999.
Private-credit Bubble
If that seems worrying, the parallel boom in non-bank lending is as bad. Non-bank private credit—lending by funds, insurers and shadow financiers, especially riskier midsized firms, has ballooned to about 3.8 times the GDP (gross domestic product) in Europe and 3.1 times in America.. Banks have lent around a tenth of their loan books to these intermediaries.
The IMF reckons, American and European banks have lent US$4.5trn to private-credit firms, hedge funds and other non-bank lenders. A serious default could wipe out a chunk of their tier-1 capital—the capital cushion designed to absorb shocks. Yet, this system, vast and opaque, sits largely beyond the regulators’ reach. Their rise was accelerated by the very regulations—Basel capital rules—designed to curb banking risk.
Fintechs, hedge funds and insurers now lend directly to riskier borrowers. Nearly half of American life insurers’ bond holdings are in private placements, invisible to markets and regulators. The system depends on faith, not transparency.
Connected to speculative excesses in these two areas is irrational exuberance in private equity and the crypto boom.
Nobody knows what will spoil the party and when, but when it does, the scaffolding of credit and cross-holdings may give way. And, it will not stop at developed markets. The contagion will spread to emerging markets, like India, as investors sell indiscriminately to raise cash. If we are lucky, the dark clouds will lead to a few showers, not a hurricane. Those who have exposure to the market would do well to have their own risk mitigation measures in place.
(This article first appeared in Business Standard newspaper)
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