The heavy investments that tech giants such as Meta, Microsoft, and Google have poured into AI programs have sent stock market analysts and investors into a frenzy. But when analyzed critically, these investments indicate the possibility of an AI tech bubble and an overvaluation of tech companies. These issues may significantly hamper the market. But what happens when the AI bubble bursts?
Fareed Zakaria posed this question to Ruchir Sharma, Chairman of Rockefeller International.
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In the interview, Fareed Zakaria discussed the Shiller Cyclically Adjusted Price-to-Earnings (CAPE) ratio—a metric that measures stock prices against company earnings. Ruchir Sharma began by defining what constitutes a bubble, saying, “I define a bubble with four O’s.”
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The First O: Overvaluation
The first “O” signifies that business bubbles generally start with overvaluation of a specific business activity. A deeper dive into historical data shows that the only times these values have been this high were in 1929—just before the stock market crash—and in 1999, during the dot-com bubble. The similarity to these two crashes further highlights the possibility of an overvalued market.
The Second O: Overinvestment
Ruchir Sharma explained that another telltale sign of a bubble is overinvestment in a single theme or sector. According to empirical data, current expenditure in the tech industry is only a few steps behind the levels seen during the dot-com bubble.
Another graph showcases that tech investments contributed nearly 40% to the U.S. GDP in 2024–2025. Ruchir further noted that companies once flooded with cash are now issuing debt due to the relentless race to outspend each other in AI. He stated that the recent investment spree displays clear signs of overvaluation, over investment, and over leverage.
So this is another significant difference-in almost a bad way compared to 1999-2000. At that point in time, the buildup in investment was much more gradual.
"This time, there's such an arms race on to be the leading player in AI, that the acceleration that you have seen in investment in AI has been huge. And so therefore, even some of the big companies that at one point in time used to be flush with cash, like Meta or Amazon, these companies now are issuing debt for the first time in a long while. So Meta has gone from having a net cash position to now being one of the big issuers of debt just to finance the AI boom."
Ruchir cautioned that there is no clear indication of when this bubble might burst. He said that bubbles generally end when major players run out of money to invest—and we are beginning to see signs of that. Typically, a bubble collapses when the U.S. Federal Reserve raises interest rates, triggering the bursting of the bubble, as seen in previous cases.
"typically what bursts a bubble, what bursts a bubble is when people run out of money to invest in this frantic way. And so I think that what's happened now is that currently we are seeing some signs of that, you know, because people are issuing much more debt."
"But usually the catalyst is when the U.S. Federal Reserve decides to increase interest rates, and that typically bursts bubbles. So you refer to 1929, 1999, that was the one common factor behind those bubbles bursting. And so that's the one thing which gives a lot of the optimists some hope still, that this bubble can inflate further because the Fed is still keen to cut interest rates, prodded partly by the White House, but in general, it's keen to cut interest rates."
U.S. Federal Reserve’s Action
Ruchir highlighted that tech companies have shown signs of slowing their investment spree after the Federal Reserve merely indicated that it may not change interest rates in December. If, by next year, inflation rises and interest rates are adjusted, the market could face a possible fluctuation.
Another concern he mentioned is the growing fear among people about AI potentially taking their jobs.
"Those of us who lived through the late 1990s, you remember that is a period of incredible optimism. The difference this time is that people are really scared about what AI may bring, because even the techno-optimists who are embracing AI, they are telling us that we're going to take your job away. And if you don't know how to use AI, you're going to be in big trouble.
So that's the fear that AI has brought. So if and when this AI bubble does burst, I think you'll have very mixed emotions. At one level, I think people will just be a bit relieved.
On the other hand, because of the amount of exposure that the American economy has and the average household has to the equity market, that's going to be painful. Yeah, and if it unwinds, I think it will have a big effect, because the pessimism is already there, and more pessimism means less spending and less economic activity."'