The US equity market may be in or is approaching an AI-driven bubble, according to Chief Equity Strategist Alexander Redman, who noted that surging AI investment is driving growth while raising concerns about monetization. “From an evaluation standpoint, it certainly looks as if we are either in or at least approaching bubble territory,” Redman said, noting that “we don’t need to discuss monetizing this in a few years. We need to have this monetized today to get a positive ROI.” He was speaking as a part of a media briefing at CLSA's India Forum.
He highlighted extreme concentration in the S&P 500. “More than half of earnings is coming from just seven stocks… almost half the index market cap now is just 10 companies.” Redman also pointed to stretched valuations across the market. The S&P 500’s price-to-sales ratio is the highest ever recorded, suggesting investors are paying more for each dollar of revenue than at any point in history. While rising profit margins partially mitigate the concern, adjusted P/E ratios have now surpassed November 2021 levels, leaving only the dot-com era as a higher benchmark. Other metrics also signal caution: earnings yield versus bond yield is at its lowest since 2002, while equity risk premiums and high-yield spreads offer minimal protection.
Aggressive earnings forecasts further stretch the market. “The long-run 40-year compound annual growth rate in S&P 500 EPS is 6.7%… last year’s growth was 10%, this year projected at 12%, and consensus has 14% for both 2026 and 2027,” Redman noted.
AI capital expenditure is fueling much of the rally but carries significant risk. “This is a third of a trillion dollars, probably spent the quickest in history… some brokers are saying it could reach almost a trillion dollars a year,” Redman said. Much of this is debt-financed. “At some point, a significant portion of that will be debt-financed… It will end in tears. There’s no way you can keep that indefinitely.”
He also pointed to OpenAI’s $1.5 trillion investment with almost no revenue and rising competition: “A number of US firms I met are actually using free open-source data from Alibaba rather than paying domestically.”
Outside AI, the US economy shows warning signs. Private-sector employment indicators suggest a slowdown, inflation remains sticky at 3–4%, and consumer sentiment and housing market indicators are softening. Federal debt is projected to reach 120% of GDP within a decade, adding fiscal pressure.
“AI CapEx alone seems to be driving the economy,” Redman said. “If that dries up, it’s unclear what ultimately supports US growth in this market.” Excess liquidity has temporarily masked weaknesses, but Redman’s models suggest the market is about 4% overvalued relative to fundamentals, with little upside over the next 12 months.
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