What does AI bubble burst look like? Four key features can be seen in this week’s market “rehearsal”

What would it look like if the artificial intelligence (AI) market bubble bursts? The financial markets have been rehearsed this week.

In fact, the warning signs of an AI bubble are well known, ranging from worryingly high debt levels to the use of creative methods to remove debt from balance sheets, which has caused concern. Professional investors pointed out that the two major concerns are the irrational greed for AI and the massive issuance of debt by large-scale cloud companies to raise financial resources for AI investment. Major central banks, the International Monetary Fund (IMF), the Bank for International Settlements (BIS) and other institutions have also warned that the boom in AI investment may not last forever. Once the environment changes and investment suddenly stops, it could cause a systemic shock.

This is all old news, but why did the market environment turn so bad in the second half of this week? The South Korean stock market, which is home to chip stocks, fell 8% in a single day, corporate bonds issued by data center operators fell, and the price of credit default swaps (CDS), which protect against bankruptcy risk, soared. The US financial market hasn’t collapsed, but all this has given investors a taste of the possibility of the AI ​​bubble bursting.

Two major signals are clearly visible. One, high-quality but uninteresting non-tech stocks have performed relatively well. Second, the prices of US government bonds, which have been hammered by investors recently, have stopped falling and are rising. This suggests that investors who are worried about the bursting of the AI ​​bubble and the impact on US economic growth have quickly fled to safe assets to avoid risk. Even though this week’s inflation data was warmer than expected, which typically stimulates a rise in yields, the 10-year US Treasury yield fell instead of rising. Bond prices have an inverse relationship with yields.

Another anomaly is that the US dollar, which often attracts safe-haven buying during times of market turmoil, has weakened significantly this time. The US Dollar Index (DXY) fell nearly 1% from Wednesday’s high, lending credence to the theory that once the “AI bubble” bursts, global funds will move away from US markets and US dollar assets.

In general, financial markets this week have previewed the possible scenarios that will arise from the bursting of the “AI bubble.” Four features are clearly visible: the depreciation of the US dollar, a surge in government bond prices, the collapse of asset markets supported by the semiconductor boom, and the return of old economy stocks.

What is the reason that provokes risk aversion in the market? Analysts pointed to several factors, including Broadcom’s CEO warning chip stock investors not to treat the market like a casino; CoreWave is seeking financing and plans to turn to insurance companies; And many data center operators’ plans to list on Australian and Asian stock exchanges have failed.

These are all small things, and alone they are not enough to change the market situation; But when combined, they add more and more evidence to the fact that “the heyday of AI stocks has passed.”

In other words, the days of making easy big bucks by buying AI stocks are over. Now investors are beginning to ask a real question of AI-related companies: How to convert huge capital expenditures into sustainable revenue growth? Please prove it to me.

Market reaction this week shows that investors are not only skeptical about the prospects of AI stocks, but are fleeing to a specific safe haven: government bonds from advanced countries that have become very cheap.

So far, AI stocks have only “declined” and have not yet “collapsed”. It is unknown what will cause future market declines. But market sentiment has clearly changed. The rise of AI stocks depends on the optimistic environment, but this will also end if the environment worsens.