'The most hated bubble in history': Ruchir Sharma warns AI frenzy shows all four signs of a crash

Global investor Ruchir Sharma described the current AI-driven market frenzy as "the most hated bubble in history" and warned that soaring valuations, rapid investment spikes, and rising leverage mirror the conditions that preceded some of the biggest market crashes of the past century. 

Speaking to Fareed Zakaria on CNN, Sharma, the head of Rockefeller Capital Management's international business, said the four classic signs of a bubble - overvaluation, over-investment, over-leverage, and over-ownership - are all flashing red.

Asked about a historical chart produced by Nobel laureate Robert Shiller, Sharma said, "Historically, the stock market valuation today is very expensive." Zakaria noted that the only comparable peaks came in 1929, just before the crash, and 1999, before the crash of the dot-com bubble. 

Sharma agreed: "We have definitely overvaluation. So that's the one big O."

The noted investor said the next sign - overinvestment - is now evident in the breakneck pace of AI spending. "Today, if you look at the amount of money going into AI, that tech spend, as a share of the economy today, that's already comparable to what you saw at the peak in the 2000 internet boom," he said. The acceleration, he noted, is far sharper than in previous cycles. "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."

Sharma said this race has pushed even cash-rich tech giants to borrow. "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." He added that the third sign—over-leverage—is beginning to show up across the market.

The final signal, the economist said, is over-ownership. "If you look at the bubble today, the amount that people have exposure towards the equity market, the over-ownership, the 4th O, is very high. This is now higher than what it used to be back in 2000.” 

Zakaria pointed out that, historically, the only matching period was the dot-com peak; Sharma replied, "We are in fact higher than that point now."

The investor said predicting the exact moment a bubble bursts is impossible, but the usual trigger is when investors "run out of money" or when the U.S. Federal Reserve tightens policy. "Typically, what bursts a bubble is when the U.S. Federal Reserve decides to increase interest rates...That was the one common factor behind those bubbles bursting," he said.

He added that the recent wobble in U.S. markets was triggered by just a hint of delayed rate cuts. "All it has taken is for the U.S. Federal Reserve to say they may not cut interest rates in December. If by any chance next year inflation goes up and the Fed is forced to increase interest rates, then I think that what you could be staring at is a big, big downturn." Until then, he said, "everyone says the party is still on, the music is still running, and we've got to keep dancing."

Zakaria asked about a chart showing comfort levels with new technology collapsing from 72% in the dot-com era to 31% today. Sharma said this anxiety defines the current moment. "This is the most hated bubble in history. People are really scared about what AI may bring." He added that even techno-optimists frame the future in alarming terms: "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."

If the bubble bursts, Sharma said the aftermath will be emotionally complicated. "At one level, people will just be a bit relieved. On the other hand... that's going to be painful."