The U.S. stock market is experiencing a puzzling phenomenon: despite significant volatility in artificial intelligence and chip-related sectors, with some individual stocks seeing their bubbles burst, the S&P 500 index is only 1.6% below its all-time high. Its equal-weight version even hit a new high last week, indicating that the bursting of local bubbles has not triggered a systemic shock to the broader market.
Over the past decade, the U.S. stock market has undergone multiple rounds of sector-level "mini bubbles," including 3D printing in 2014, Chinese stocks in 2015, low-volatility strategies in 2017-2018, special purpose acquisition companies and clean energy in 2021, small-cap AI concept stocks from 2023 to 2026, cryptocurrency-related stocks, and Trump-linked concept stocks. For example, memory chip maker SK Hynix saw its stock price drop by up to 55% from its peak before rebounding on Friday. Sneaker company Allbirds, after pivoting to AI and rebranding, saw its stock decline by over 85%. These sector bubbles typically inflate and burst within just a few months, with individual stocks or sub-sectors shedding hundreds of billions of dollars in market value.
Analysts attribute the frequent occurrence of such bubbles to loose monetary conditions, speculative psychology, and the pursuit of new technologies. These factors have been significantly amplified since the 2007-2009 financial crisis. The sources of funding have varied by stage: in the 2010s, it was primarily central bank liquidity; after 2020, government fiscal spending surged; and this year, it has been accompanied by notable growth in margin balances and leveraged ETFs. Zero-commission trading platforms and gamified operations have further lowered the barrier to stock speculation.
The reason these mini bubbles have not caused severe damage to the overall economy and financial system is that most are not driven by debt financing. While investors may suffer losses, the financial system remains generally stable. A global macro strategist points out that a healthy banking system means there will always be credit available to support the formation of the next bubble. The economic impact of capital misallocation is a subject of academic debate: building railroads quickly with significant investor losses compared to slower, more financially prudent construction methods—there is no clear consensus on which is better. While some clean energy investments are seen as a necessary cost in addressing climate change, a substantial amount of capital has also been wasted on speculative assets like Dogecoin and failed special purpose acquisition company projects.
What warrants attention now is that the scale of investment in the artificial intelligence sector is entering a dangerous zone. Data center investments over the next four years are projected to reach $7 trillion. If these investments fail to deliver sufficient productivity gains, they could cause substantial economic damage. More critically, the proportion of debt financing in AI investments is rising. If the AI boom is confirmed to be a bubble, its impact on the financial system will no longer be limited to a single sector, and the entire market will find it difficult to escape unscathed.
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