Legendary investor Jeremy Grantham, co-founder of GMO and famed for his accurate predictions of market bubbles such as the 2000 dot-com bubble and the 2008 financial crisis, has stated in a recent interview that artificial intelligence (AI) is a classic market bubble waiting to burst. Grantham's core thesis is surprisingly straightforward. He asserts that, over the long term, the only consistently reliable strategy is to buy assets when they are cheap—the essence of classic value investing. Most other purported sources of "excess returns" that investors believe in can ultimately be traced back to this same principle. For instance, the often-cited small-cap premium stems less from a size advantage and more from a structural mechanism: fund managers are compelled to sell stocks that have appreciated beyond the small-cap classification and buy those that have fallen into it, effectively creating a structural rebalancing towards value investing. So, what does this imply for today's investors? Grantham points out that the answer clearly does not lie in U.S.-listed equities. While AI-related capital expenditure and market euphoria have driven stock prices higher, the laws of mathematics are unforgiving—the higher current prices climb, the lower future returns are likely to be. Grantham added that AI is not immune to the market's long-term laws. Much like the railways of the 19th century or the internet in the late 1990s, it is a genuinely transformative technology—and precisely for that reason, it forms the foundation for a "huge bubble." Equity ownership and valuation levels have far surpassed reality, and a sharp market correction is inevitable before the ultimate winners emerge. However, this does not mean one should abandon the U.S. market entirely. Grantham remains optimistic about start-ups, believing that the most attractive opportunities today are not in public markets but in the venture capital space. It is worth noting that this is not Grantham's first warning about an AI bubble. In February of last year, he stated that, like all world-changing technologies, AI would ultimately lead to a bust that harms investors. He compared the booming AI technology to the 19th-century British railway expansion, calling it "one of the most spectacular failures," noting that while vast sums poured into this GDP- and productivity-enhancing network, "every truly important new technology has a bubble." In March of last year, Grantham also warned that U.S. stocks were in a "super bubble," the third-largest in history, trailing only Japan's 1989 bubble and the contemporaneous real estate bubble. Concerns about an AI bubble burst were a key factor behind the U.S. stock market's poor performance in the final two months of last year, as investors grew wary that the technology had not yet generated the profits needed to justify the massive capital expenditures by tech giants. A survey conducted by Deutsche Bank earlier in December highlighted this sentiment; among 440 asset managers polled, more than half cited an AI bubble as their top concern for 2026. Jim Reid, Head of Global Economics and Thematic Research at Deutsche Bank, who led the survey, stated that the results very clearly indicated one thing: "AI/tech bubble risk overwhelms everything." Ray Dalio, founder of Bridgewater Associates, warned earlier this month that the AI boom, which previously fueled a rally in U.S. tech stocks, has "now moved into the early-stage bubble phase." Dalio stated, "Clearly, investors prefer non-U.S. equity assets over U.S. equities. Similarly, they prefer non-U.S. bond assets over U.S. bonds and dollar cash... Undoubtedly, there is enormous uncertainty regarding the future path of Fed policy and productivity growth prospects. All signs suggest that the new Fed Chair and the FOMC are likely to favor suppressing nominal and real interest rates. While this would support asset prices, it would also further inflate bubbles." Richard Bernstein Advisors (RBA) also issued a warning this month, stating that excess liquidity is pushing asset prices to levels far beyond fundamental support, and the current market bubble has spread beyond AI into a "full-blown party." Mike Contopoulos, the firm's Deputy Chief Investment Officer, recently remarked, "We are in some sort of 'everything bubble' right now. It's not just AI—cryptocurrencies, meme stocks, SPACs, investment-grade bonds, high-yield bonds, nothing is immune." The veteran, with 25 years of market experience and a former role as Head of High-Yield Strategy at Bank of America, pointed the finger at loose monetary and fiscal policies for fueling this valuation party detached from fundamentals. Nevertheless, many market participants remain steadfast in their bets on the AI wave. Strategists at Bank of America Global Research said they "do not yet see an AI bubble of any sort." A report from the bank indicated that the global AI arms race remains in the "early to middle innings." Vanguard, one of the world's largest asset managers, noted in a research report that the AI investment cycle might only be 30%-40% complete relative to its eventual peak, although the giant did acknowledge that the risk of a correction in large-cap tech stocks is indeed increasing. Furthermore, Philippe Laffont, founder and portfolio manager at Coatue Management, argued that the current AI investment boom has one crucial difference from the "internet bubble era"—what he terms "hyperscale advantage." This refers to tech giants like Google (GOOGL.US), Microsoft (MSFT.US), and Amazon (AMZN.US), which possess immense cash flows and are expected to invest over $500 billion next year in AI computing infrastructure. Unlike the dot-com era, these cash-rich and profit-stable giants are the core drivers of the AI wave, a stark contrast to the year 2000 when many leading companies were nascent tech firms far from profitability.
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