AI bubble alarm rings across Wall Street! Oaktree Capital's Marks disagrees: The market hasn't reached its most dangerous moment yet, and investors are not completely oblivious to risks.

According to Zhitong Finance APP, from billionaire hedge fund giants such as Ray Dalio and Michael Novogratz to countless lesser-known market observers, an increasing number of professional investors believe that, fueled by the artificial intelligence (AI) trading boom, the U.S. stock market is on the verge of a bubble.

Every time the Nasdaq 100 Index hits a new all-time high, mentions of the “internet bubble” in news reports surge. Earlier this month, when the index once again reached a record high, this trend was evident. The pervasive anxiety in the market may help explain last week’s sell-off—the Nasdaq 100 Index dropped by 5.5% in total last week.

Number of news stories referencing the internet bubble increases as tech stocks rise

However, if there really is a bubble in the current market, Wall Street investors seem to find it increasingly hard to define. Take the simplest indicator, price-to-earnings ratio (P/E). Unlike the internet bubble period 25 years ago, when P/E ratios soared to clearly overheated levels, this year the forward P/E for benchmark indices like the S&P 500 and Nasdaq 100 has actually declined, as the market expects explosive growth in corporate earnings. In fact, in the month before the 2000 market peak, the average forward P/E of the five largest tech stocks in the S&P 500 was about 65, whereas today, the five largest tech stocks have an average forward P/E of around 23.

So, what current market characteristics have led so many people to think a bubble is forming? If their judgment is correct, what factors would be needed to burst the bubble? Market professionals point to several signs of overheating, including extremely high levels of debt, unsustainable earnings growth expectations, and market sentiment and behavioral patterns similar to those seen in past bubbles.

Howard Marks, Co-Chairman of Oaktree Capital Management, said: “If you have to pick a defining feature of a bubble, it’s probably this—bubbles morph into public frenzies, into crazes that sweep up everyone, where some people make a fortune while everyone else who hasn’t joined in feels foolish and regrets missing out.”

Marks accurately predicted the market top during the internet bubble, and last year warned that he was in "bubble-watching mode.” He states that the definition of “bubble” is “rather vague,” but generally, it means market prices have clearly exceeded levels justified by rational judgment, with risk appetite and sentiment disconnected from reality. In a telephone interview, he said: “A bubble means irrational exuberance and reckless risk taking. ‘Blissfully unaware’ is a very fitting term as well.”

When analyzing the bubble indicators he’s focusing on now, Marks does not believe the market has yet reached that stage. Although investors are showing the typical fear of missing out on further tech stock rallies, the constant comparison of today’s rally to previous bubbles suggests investors are not completely oblivious to risks.

As for another signal—reckless investor behavior—there are currently contradictory signs. Traditional P/E methods do not show typical bubble features at current levels, though if valuation multiples are calculated based on earnings over the past ten years, the resulting indicators are more concerning.

Reckless Investor Behavior

On the technical side, traders note similarities between the current market and stock market crashes that followed previous bubble bursts. They cite certain indicators, such as record-breaking equity and bond issuance occurring alongside extreme levels of market momentum. Other worrying data includes the wide gap between the best and worst performing stocks within the same sector and a market rally supported by only a narrow group of stocks.

Michael O'Rourke, Chief Market Strategist at JonesTrading Institutional Services LLC, believes the drop in P/E for large tech stocks is justified, as these companies are taking on huge amounts of debt to build AI infrastructure. He notes that when companies significantly increase leverage, their valuation multiples usually contract. Given the cyclical nature of related investment financing, this is especially concerning.

O’Rourke said in an interview: “Vendor financing has reached a whole new level,” to the point where chipmakers themselves have to subsidize customers’ purchases of their own products, “otherwise, those procures simply wouldn’t happen.”

A metric that worries some investors is the cyclically adjusted price-to-earnings ratio (CAPE), which values stocks based on average inflation-adjusted profits over the past 10 years. This metric, also known as the “Shiller P/E” after Yale economist Robert Shiller, who published “Irrational Exuberance” in March 2000 just as the market peaked, is called by DataTrek Research co-founder Nicholas Colas “the most widely known, and most frightening, valuation chart in existence.” It currently shows a market multiple of about 41, just shy of the all-time high of 44 in 1999.

CAPE index breaks to high levels

Another troubling area is the high concentration at the top of the stock market. Today, the United States’ three largest companies by market value—NVIDIA (NBDA.US), Apple (AAPL.US), and Microsoft (MSFT.US)—together account for about 21% of the S&P 500's weight. In October 1999, it would have taken nearly 10 stocks to reach this proportion.

Despite all these technical warning signals, over the past 10 years, the Nasdaq 100 index has outperformed the S&P 500 by a cumulative 250 percentage points—a performance that’s hard to ignore. Veteran investment industry newsletter writer Jim Paulsen said: “Even if you have some concerns about tech stocks, you can’t give up on them. Giving up on them almost seems foolish because they always outperform.”

Market Frenzy

Many who focus on bubble risks include investor sentiment as a key checklist item, but this year, whether among institutional or retail investors, market sentiment can hardly be described as exuberant. High inflation, uncertainties related to midterm elections, and wars in the Middle East all prompted traders to adopt defensive strategies at different points during 2026. Meanwhile, the Nasdaq 100 has seen multiple pullbacks and even a full 10% correction.

Nevertheless, signs remain that investors are excited—even euphoric—about market opportunities from the AI revolution, including some companies boosting their share prices simply by changing their names. Even the leader of one of the major beneficiaries of the AI boom has criticized the frenzy. Broadcom (AVGO.US) CEO Hock Tan said the AI mania has attracted investors “who have no idea what they're investing in,” likening their behavior to gambling in a casino.

At least anecdotally, another often-cited bubble warning signal is: investors talking about investments during chance encounters with service workers. According to a widely circulated story, Joseph Kennedy said he knew it was time to sell stocks in 1929 when the shoeshine boy started giving him stock tips.

CFRA Chief Investment Strategist Sam Stovall recently had a similar experience. He said when talking to a newsstand operator in New York, the man asked him to print out research reports on AI-related Intel (INTC.US) and Cisco (CSCO.US) stocks.

Blissfully Unaware of Risks

No matter which signal investors focus on, as the current bull market enters its fifth year, discussions on Wall Street about the possibility of a market bubble are becoming ever more common.

According to aggregate industry research data, during the second-quarter earnings season, corporate executives and analysts discussed similarities between today’s market and both the 2008 global financial crisis and the tech bubble in 15 separate investor calls, with participants including Goldman Sachs (GS.US), Analog Devices (ADI.US), and Blackstone Group (BX.US).

Meanwhile, interest rates have risen sharply to levels sufficient to trouble previously favored market darlings. CoreWeave (CRWV.US) shares nearly doubled from January to early May, but after plunging last week, are now negative for the year, while the company’s bond yields continue to rise.

Brian Reynolds, Chief Market Strategist at Reynolds Strategy LLC, said: “Generally, what ultimately ends a market cycle is problems in the credit market. When people get margin calls in the credit market and cannot meet them, that’s when the real trouble starts.”

When people believe a technology can change the world and create extreme stock market enthusiasm, the bubble will burst. O’Rourke noted that investors “get overconfident and then pay too high a price. That’s what bubble psychology really means. The problem isn’t that AI can’t change the world.”

Looking back at cases such as the rise of the internet, the related technologies ultimately succeeded and brought profound change. At the same time, the stock market rally, via IPOs and secondary share offerings, spurred a surge in stock supply. However, when corporate profits fail to meet expectations and interest rates start to climb, gains concentrated in a few stocks begin to reverse.

Nevertheless, Marks still has not observed the classic bubble sign in the market: investors being “blissfully unaware” of risk. In fact, it seems everyone on Wall Street is discussing whether there might be a bubble. Marks said: “If enough people start to cautiously wonder whether there’s a bubble in a certain area, there’s good reason to believe that—even if there’s a bubble—it’s likely somewhat contained.”