Bill Dudley, a former president of the Federal Reserve Bank of New York, says the US stock market is in bubble territory, pointing to stretched valuations and a slowing artificial intelligence investment cycle. According to reports from Bloomberg Television, Dudley made these comments this week as Treasury Secretary Scott Bessent moves to contain a sharp rise in long-term bond yields. The warning comes amid growing concerns about market valuations and their sustainability, with Dudley now providing additional analysis of why the bubble is likely to burst before the end of 2027.
Dudley pointed to the Shiller CAPE ratio, which sits near 41, compared with a 25 to 30-year average of about 17, and a record of 44 set in December 1999. As reported by Bloomberg, this metric indicates investors are paying far more for each dollar of company earnings than history suggests is safe. Additionally, the real equity risk premium (the expected pickup in return from holding equities versus inflation-indexed Treasury bonds) currently stands around 1.1%, or less than half the average since 2010. The Buffett Indicator, the ratio of stock market value to gross domestic product (GDP), stands around 240%, with Warren Buffett noting that readings above 100% signal an overvalued market. These indicators collectively suggest the stock market is strongly overvalued according to historical standards.
Dudley expects capital expenditure (capex) growth among AI hyperscalers to decelerate in 2027, which would squeeze profit margins across the sector and its suppliers. According to Bloomberg reports, he also questioned whether the industry can generate the estimated $2 trillion in revenue needed to justify current investment levels. Historically, Dudley noted that excess returns from major technological booms tend to get competed away as rivals pile in, suggesting current AI investment levels may be unsustainable. The favorable impact of the artificial intelligence investment boom on economic activity and earnings will likely diminish significantly in 2027, as the increase in investment in 2026 will almost certainly be the peak. Dudley expects AI to follow the trajectory of other great technology booms, noting there will be an inevitable glut of overcapacity that will weigh on profits and stock prices, turning the investment boom rapidly into a bust.
The 30-year Treasury yield surged above 5.3% this week, its highest level since 2007, prompting the Treasury Department to respond with a long-bond buyback increase. As reported by Bloomberg, the Treasury doubled the size of its debt repurchases to contain the sharp rise in long-term bond yields. However, Dudley noted that the fiscal backdrop complicates the Federal Reserve's task regardless of the bond-market intervention, stating 'The Fed has to take the world as it is.' The rise in yields puts increased strain on equity market valuations, with risks tilted toward further yield increases given the lack of political will to address the nation's unsustainable federal debt trajectory.
Dudley provides specific reasons why the current bubble will likely burst before the end of 2027, noting that there aren't sufficient resources — construction workers, electrical generation capacity, or chip manufacturing capacity — to increase investment by the same magnitude in 2027. Nor are the dominant hyperscalers likely to have the free cash flow and balance sheet capacity to sustain a bigger increase in investment in 2027 compared with 2026. The macroeconomic environment is likely to become more challenging as real and nominal long-term rates have increased significantly this year. Dudley warns that bubbles often become much bigger and last longer than anticipated because the expansion of the bubble sustains investment and profit growth, but notes that the feedback loop can run powerfully in reverse when demand collapses, leading to drops in cash flows and reevaluation of lending risks.
