Ikigai Asset Manager has issued a stark warning about AI market excesses, arguing that investor optimism has moved into 'a zone of visible excess' with several indicators simultaneously approaching levels historically associated with market euphoria. According to the portfolio management firm's latest quarterly newsletter, the Nasdaq 100 has delivered cumulative returns of more than 640% over the past decade, surpassing even the gains recorded during Japan's equity bubble of the 1980s, the roaring US bull market of the 1920s and the technology boom of the late 1990s. The S&P 500 is trading at a cyclically adjusted price-to-earnings (CAPE) multiple above 35 times, a level witnessed only a handful of times over the past century and close to the peak of the dot-com bubble. Margin debt extended by US brokers has crossed a record $1.3 trillion, while retail borrowing has accelerated sharply, with market concentration reaching unusual levels as the top 10 companies now account for nearly 40% of the S&P 500.
US equity funding markets remain strained as high demand for leverage, driven by tech and AI stock enthusiasm, keeps repo rates elevated. According to The Economic Times, financing costs climbed to roughly 200 basis points above the federal funds rate on June 26, the highest since December 2024, before falling to 89 basis points. Federal Reserve data shows dealers held about $211 billion of equity financing exposure on their balance sheets as of June 24, with borrowing activity concentrated in tech and semiconductor firms. Primary dealers' equity repo exposure relative to the S&P 500's free float adjusted market capitalization has climbed 50% over the past year, indicating that each dollar of investible equity capital is increasingly supported by leverage. Sam Earl from Barclays estimates the equity financing market is roughly $10 trillion in size, with a 10% increase in leveraged equity exposure translating into about $1 trillion of additional financing demand.
Taiwan's central bank governor has issued a stark warning about AI bubble risks from over-leveraged tech firms, despite real growth driving the AI boom. Speaking at a parliamentary hearing on Thursday (July 9), Governor Yang Chin-long told lawmakers that while the growth driving the artificial intelligence boom is real, so are the risks of an AI bubble. According to CNBC TV18, Yang warned that the central bank must carefully monitor the risks of speculative capital expenditures financed by aggressive corporate borrowing within the tech sector. "We do have concerns about the possibility of an AI bubble," Yang said. "AI is driven by real growth potential, but it's the possibility of over-expansion via over-leveraging that concerns us." At the central bank's quarterly meeting in June, its board did not consider inflationary pressures amid the AI boom sufficient to justify an increase in interest rates, although the decision to hold rates steady was not unanimous.
The Bank for International Settlements (BIS) has issued a stark warning about the AI investment boom, stating that artificial intelligence is becoming an inflation challenge for central banks and could trigger a sharp reversal in investment and broader financial conditions. According to the BIS's 2026 Annual Economic Report, AI-driven optimism has fueled a surge in spending on semiconductors, data centers and power infrastructure, but this surge may not be sustainable. The central bank warned that if AI payoffs disappoint, the resulting pullback could have major financial consequences, given AI firms' rising leverage and growing footprint in credit markets. The BIS drew parallels to historical technology booms, including the canal mania of the 1830s, Britain's railway mania in the 1840s, the electrification boom of the 1920s, and the dot-com bubble of the late 1990s, where breakthrough innovations attracted more capital than commercial returns could support.
Ikigai estimates that Alphabet, Amazon, Meta and Microsoft alone will spend around $700 billion on capital expenditure this year and more than $800 billion next year, with including Oracle, OpenAI, Anthropic and other AI infrastructure providers, expected AI investment to reach more than $1 trillion next year—equivalent to roughly 3% of US GDP and about one-third of the total pre-tax profits generated by all US non-financial companies. The four largest hyperscalers are expected to spend almost 92% of their operating cash flows on capital expenditure by 2026, up from 41% in 2023, while roughly 28% of operating cash flow is expected to be spent on memory alone this year. Market concentration has reached unusual levels as Taiwan Semiconductor Manufacturing Co. represents 58% of Taiwan's benchmark, while Samsung Electronics and SK Hynix together account for more than half of South Korea's technology leadership. The first signs of rotation may already be emerging as the Magnificent Seven have recently begun underperforming both the broader S&P 500 and the Russell 2000, suggesting investors are slowly moving beyond the narrow AI leadership that has dominated markets.
The BIS highlighted growing financial vulnerabilities tied to AI exuberance, while noting that easy financial conditions, compressed risk premiums and elevated equity valuations have increased the scope for a market unwind. According to the central bank's analysis, increasingly opaque financing of AI projects, high leverage, and the expanding role of private credit could amplify any downturn. Ikigai believes the key risk is not that AI fails, but that investors begin questioning whether these unprecedented investments can generate adequate returns. "A sudden realisation that hyperscalers, OpenAI and Anthropic may not earn sufficient returns on AI-related investments could trigger an unwillingness to continue funding these investments," the fund said, adding that financing arrangements between suppliers and customers could amplify such a reassessment. Prop trader Kevin Muir from Toronto compared the current environment to a crowded trade where optimism has become deeply entrenched, noting that the recent funding spike "signifies the monstrous amount of demand in equity markets."
JPMorgan has projected that global AI-related spending could reach $5.5 trillion by 2030, while Alphabet, Amazon, Meta, and Microsoft are expected to spend up to $720 billion this year. Morgan Stanley has estimated that nearly $3 trillion in AI infrastructure investment could move through the economy by 2028. However, Apollo Global Management Chief Economist Torsten Slok warned that lofty AI valuations risk a 'painful repricing' if businesses beyond the tech sector fail to realize meaningful returns on AI investments as quickly as investors anticipate. Slok argued that AI stock valuations reflect expectations of a productivity boom that has yet to materialize, creating a mismatch between current earnings expectations and actual time firms need to generate ROI on AI investments. Market sentiment reflects these concerns, with the Global X Artificial Intelligence & Technology ETF (AIQ) up 50% over the past 12 months, while the iShares U.S. Technology ETF (IYW) is up 45%.
Federal Reserve Bank of Cleveland President Beth Hammack echoed similar sentiments, saying that the AI data center buildout is contributing to pressure on prices. As reported by the BIS, Hammack stated she's hearing about pressure from insurance and electricity markets. The Fed may have to hike interest rates to bring inflation back under control. Market sentiment reflects these concerns, with the Global X Artificial Intelligence & Technology ETF (AIQ) up 50% over the past 12 months, while the iShares U.S. Technology ETF (IYW) is up 45%. However, retail sentiment on Stocktwits regarding the S&P 500 ETF was in 'bearish' territory, with the SPDR S&P 500 ETF (SPY) rising 0.78% and the Invesco QQQ Trust ETF (QQQ) surging 1.65% at the time of writing.
