Commentary: Is the AI stock bubble finally bursting?

The AI stock market bubble may be on the verge of bursting, according to Financial Times reporter Katie Martin. This is the third significant shakeout of tech stocks in recent weeks, and this time, investors are more concerned about the possibility of the AI bubble finally bursting. Although AI technology does work, the AI-related stocks have become a major force in US and global markets, leading to concerns about the sustainability of the party.

Some of the potential sources of stress in AI assets include high levels of creative debt, questionable revenue potential, and circular financing. The Bank for International Settlements recently noted that nearly 29% of AI firms' investment deals are in other AI firms, and more than half of incoming investment in AI firms comes from other AI firms.

This circular financing could easily turn into a competitive disadvantage during a crisis. While US politics may be the trigger for the market correction, the election results have already had a mixed impact on global markets. However, the voters' opposition to AI development projects, such as data centres, has led to a tougher regulatory framework for the sector.

Strategist Frank Flight predicts that some projects may shift to more friendly states, but this could still delay deployment and increase costs. Pure-play AI build-out bets have suffered significant losses, with CoreWeave stocks falling 10% and Sandisk dropping 22%. The techy Nasdaq Composite fell 5% on Thursday, its biggest drop in 19 months.

However, diversified technology companies and government bonds may provide some refuge for investors during this correction.