Goldman Sachs' top strategist says there is an AI bubble — but not where everyone thinks

• The existent AI bubble is forming successful backstage markets, not successful nationalist stocks, Goldman Sachs' apical strategist said.

• He said backstage AI firms are seeing unsustainable valuations fueled by superior inflows and maturation expectations.

• But nationalist AI stocks, similar Nvidia, amusement terms maturation matching earnings, dissimilar past tech bubbles.

Investors anxious astir an AI-driven banal marketplace bubble are focusing connected the incorrect place, Goldman Sachs' main US equity strategist said.

David Kostin said connected the firm's "Exchanges" podcast published connected Thursday that the bubble isn't successful the soaring stock prices of Nvidia and different publically traded AI giants.

Instead, it's successful the private-market frenzy happening acold from Wall Street's regular terms discipline.

"I judge successful the backstage markets, the availability of capital, the terms is astir apt unsustainable, which 1 could instrumentality arsenic a synonym for a bubble," said Kostin, who is retiring astatine the extremity of the twelvemonth aft 31 years astatine the firm.

Drawing connected legendary capitalist George Soros's mentation that rising prices often pull much capital, Kostin said backstage AI valuations are feeding connected maturation expectations alternatively than fundamentals.

"As these firms are raising capital, the maturation complaint increases. As the maturation complaint increases, the valuation increases," Kostin said.

Kostin emphasized that reflexivity is conscionable 1 issue. He pointed to different hazard from "circular financing" oregon "vendor financing," successful which maturation depends connected extracurricular backing that whitethorn not clasp up.

"At immoderate point, the vendor doesn't needfully person the aforesaid maturation to beryllium capable to money that growth," helium said.

That dynamic stands successful opposition to the nationalist market, helium said, wherever prices and net person moved successful lockstep.

He cited the illustration of AI chipmaker Nvidia, whose stock terms has accrued by 12-fold successful the past 3 years — but its net person accrued by 12-fold arsenic well.

"So beauteous overmuch the terms and the net person matched each other," helium said.

Even broader valuation metrics don't look to beryllium successful classical bubble territory.

The largest companies successful the S&P 500 scale — galore of them AI-linked — commercialized astir 30 times earnings. That is good beneath the 40 times highest of the largest 10 companies successful 2021 and the 50 times multiples seen during the dot-com mania, helium said.

Capital-raising trends archer a akin story.

The US has seen astir 55 IPOs larger than $25 cardinal this twelvemonth — a fraction of the 280 successful 2021 and astir 400 successful 1999.

"There is superior availability successful the nationalist markets, but not needfully ebullient. It's determination but not truthful dramatic," Kostin said.

Read the archetypal nonfiction connected Business Insider