As 2024 draws to a close in just under a fortnight, Wall Street appears poised to celebrate yet another stellar year. The renowned Dow Jones Industrial Average, the benchmark S&P 500, and the tech-heavy Nasdaq Composite have all soared to new record highs multiple times throughout the year.
A variety of factors have propelled these major indices into unprecedented territory, including surprisingly strong corporate earnings, excitement over stock splits, and the electoral victory of Donald Trump in November. However, it’s the surge in artificial intelligence (AI) technology that’s generating the most excitement.
The potential market for AI in the long run is virtually boundless. AI-enhanced software and systems continuously improve at their tasks, adapt, and “learn” autonomously. This is why experts at PwC predict that AI will contribute an astonishing $15.7 trillion to the global economy by the end of the decade.
In light of this monumental opportunity, leading AI stocks have experienced significant gains — and deservedly so.
Nvidia (NASDAQ: NVDA) has seen its market value skyrocket by nearly $2.9 trillion since the beginning of 2023, with its graphics processing units (GPUs) becoming the gold standard in AI-accelerated data centers. Just last week, AI networking solutions provider Broadcom reached a $1 trillion valuation, becoming the 11th publicly traded company worldwide to do so. Meanwhile, AI-centric data analytics firm Palantir Technologies (NASDAQ: PLTR) is close to achieving a 1,000% increase over the past two years.
These are just a few examples of the tech giants on Wall Street that have surged due to anticipated demand for AI hardware and software, poised to transform the business world.
Despite the impressive growth forecasts for Nvidia and Broadcom, which have surpassed even the most optimistic projections, there are indications that the AI bubble may pop next year.
History Consistently Upends Rapid Rises in Cutting-Edge Innovations
The potential roadblocks that could disrupt the steep ascent of AI stocks like Nvidia and Palantir are numerous, but historical trends are particularly telling. While history isn’t a tool for precise timing, it has a flawless record of predicting downturns in market leaders at the forefront of major innovations.
About 30 years ago, the internet transitioned into the mainstream, forever altering corporate growth trajectories. However, it took years for companies to fully grasp the internet’s utility, leading to the formation of the dot-com bubble.
Since then, we’ve seen several emerging technologies and trends, such as genome decoding, 3D printing, blockchain, cannabis, and the metaverse, all of which experienced early boom-and-bust cycles.
Investors, both professional and casual alike, have repeatedly overestimated the speed at which new technologies would be adopted, leading to inevitable disappointments and massive losses in value for the leaders of these innovative trends.
To be clear, this isn’t to say that AI isn’t a transformative technology. Rather, it underscores that all new technologies require time to mature. The fact that many companies cannot clearly articulate how they will deploy AI for a positive return signals a potential bubble.
Addressing GPU Shortages Could Dampen Investor Enthusiasm
Another factor that could deflate the AI bubble in 2025 is the potential resolution of GPU shortages, which have propelled Nvidia’s stock to new heights.
Nvidia’s GPUs, particularly its H100 “Hopper” and the upcoming Blackwell GPU, have seen extraordinary demand, leading to significant backlogs. When demand far exceeds supply, prices tend to soar. Earlier this year, Nvidia’s Hopper was selling for about $40,000, a 300% premium over similar products from competitors like Advanced Micro Devices and their Insight MI300X GPUs.
However, this advantage is likely to diminish as AMD ramps up production of its next-generation MI325X GPU.
Moreover, many of Nvidia’s major clients are developing their own AI GPUs for use in their data centers. While Nvidia’s products may remain superior in performance, these in-house alternatives will be significantly cheaper and more readily available, potentially causing Nvidia to lose valuable data center market share and pricing power.
U.S. Regulatory Actions Could Stifle the AI Surge
Aside from historical precedents, regulatory actions in the U.S. could also stall the AI momentum. Under the Biden administration, restrictions were placed on the export of high-powered AI chips and related manufacturing equipment to China, impacting major hardware producers like Nvidia.
With Donald Trump set to assume office on January 20, these restrictions are unlikely to be relaxed. Trump’s first term was marked by a tough stance on China, and this approach is expected to continue. Trump has also suggested imposing a 35% tariff on imports from China from day one, potentially sparking a trade war that could severely impact AI sales to China.
AI Stock Valuations Are Becoming Increasingly Difficult to Justify
The final reason why the AI bubble might burst in 2025 relates to the unsustainable valuation premiums currently assigned to leading AI stocks. Over the past 30 years, companies at the forefront of major innovations typically peaked at around 30 to 40 times their trailing-12-month sales. This is where giants like Amazon and Cisco Systems were before the dot-com bubble burst.
In 2024, Nvidia achieved a price-to-sales ratio of over 40, while Palantir is pushing almost 69. Although it’s hard to predict exactly when investor enthusiasm will wane, history clearly shows that such high valuations cannot be sustained indefinitely.
Although firms like Nvidia and Palantir, with their robust competitive moats, deserve a premium valuation relative to their peers, the current price-to-sales ratios appear unjustifiable.
(This story updated a headline.)
Similar Posts:
- Is the S&P 500 at Risk? Rare Event Occurring Only 3 Times in 67 Years Could Be the Cause in 2025
- Nvidia vs. Broadcom: Which AI Chip Stock Should You Invest in by 2025?
- Micron’s AI Chip Stocks Set to Skyrocket by 2025, Experts Predict
- 2025 Nasdaq Boom Predicted: Top AI Stocks to Invest in Now
- Maximize Your Profits: Is Buying Stocks Pre-New Year a Smart Move? Here’s the Historical Insight!
Passionate about analyzing economic markets, Alice M. Carter joined THE NORTHERN FORUM with a mission: to make financial concepts accessible to everyone. With over 10 years of experience in economic journalism, she specializes in global economic trends and US financial policies. She firmly believes that a better understanding of the economy is the key to a more informed future.
