AI Bubble? Jamie Dimon, Nvidia’s Jensen Huang, Goldman Sachs Weigh In.

(IAN KINGTON/AFP via Getty Images)

As the artificial-intelligence boom grows, so do fears that it’s a bubble waiting to burst.

The tech-heavy Nasdaq Composite surged to a record high Wednesday, with AMD’s 11% jump leading the way. The chip maker is up more than 40% this week following the announcement of its multibillion-dollar agreement with OpenAI—the latest deal to ignite the rally.

But those gains are also fueling concerns that a bubble is forming. The Bank of England warned Wednesday that the risk of a sharp market correction has increased, citing stretched valuations particularly for companies focused on AI. Stock markets are exposed if AI optimism wanes, it added.

It is not alone. The International Monetary Fund’s managing director Kristalina Georgieva appeared to agree in a speech in Washington. It follows Federal Reserve Chair Jerome Powell’s remarks last month that stocks are “fairly highly valued.”

However, Goldman Sachs offered the counterargument. Peter Oppenheimer, the bank’s chief global equity strategist, said tech valuations were not yet at levels consistent with historical bubbles. Crucially, he added in the Wednesday note that the rally was supported by powerful and sustained profit growth as opposed to excessive speculation.

Nvidia CEO Jensen Huang is, of course, also in the “no bubble” camp. He said Wednesday that AI demand has grown “substantially” in the past six months.

So the argument was finely balanced before JPMorgan CEO Jamie Dimon waded in Thursday morning. The bank’s longstanding leader said he was far more worried than others about a serious stock market correction, in an interview with the BBC, but didn’t sound too downbeat on AI.

“The way I look at it is [that] AI is real, AI in total will pay off,” he said. “Just like cars in total paid off, and TVs in total paid off, but most people involved in them didn’t do well.”

If most companies involved in AI don’t do well that will be a big problem for markets. So investors need to be selective picking winners.

— Callum Keown

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Fed Members Disagreed About Further Rate Cuts This Year: Minutes

Minutes from the Federal Reserve’s September meeting show a committee wrestling with conflicting economic signals and struggling to reach consensus on which is more important: stubborn inflation or a weakening labor market. Ultimately, they cut rates for the first time this year and most see more cuts coming.

• The policymakers expressed concerns about persistently stubborn inflation, above the Fed’s 2% goal for nearly five years. September’s cut was needed because of lackluster employment data, but it was harder to agree on the path forward.
• Some say a cautious approach is warranted. They said the strength of the economy, the exuberant stock market, and narrow credit spreads suggest there’s no need to rush on further rate cuts. Others, such as new governor Stephen Miran, have urged further cuts.
• As of three weeks ago, Fed policymakers were cautiously optimistic about further rate cuts this year. But that doesn’t mean they’re set in their ways. Much has changed since last month’s meeting.
• A government shutdown has delayed the September jobs report and could lead to mass layoffs of government workers. President Donald Trump on Tuesday suggested that furloughed federal workers may not be guaranteed back pay, further reducing their spending power.

What’s Next: The S&P 500 and the Nasdaq Composite both closed at fresh highs on Wednesday. Markets see a 94% probability that Fed officials lower rates at its October meeting and an 80% chance they lower rates again at their December meeting, according to the CME FedWatch tool.

— Nicole Goodkind and Janet H. Cho

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Fed Chair Contender Kevin Warsh Aims to Remake the Bank

Kevin Warsh may ultimately not be President Donald Trump’s pick to lead the Federal Reserve, but in the 14 years since he last worked there, Warsh has become a leading intellectual force in the conservative movement to reform it. The goal: Downsize the central bank.

• That would start with undoing current Chair Jerome Powell’s efforts since he took the post in 2018. “The Powell Fed has failed to get interest rates about right for most of the tenure of the Powell Fed,” Warsh told Barron’s in an interview you can read here.
• In 2020, the Fed adopted a policy that would allow inflation to run above its 2% target to compensate for times when it ran below, as it had for years after the financial crisis. That orientation made the Fed late to acknowledge the danger of the post-Covid-pandemic inflation surge.
• The inflation peaked at 9.1% annually in June 2022. Fed officials blamed anyone but themselves, Warsh says, even now. At the last meeting “they said they find themselves in a very challenging position, as if they are victims. They are not victims of the state of prices,” Warsh said. “They are the cause of them.”
• The Fed’s blunders have made the central bank effectively unable to control interest rates, Warsh says. Powell’s defenders argue that while the Fed may have waited too long to react to the Covid-era inflation spike, its actions ultimately resulted in a sharp fall in inflation. Warsh, in their view, is cherry-picking moments.

What’s Next: Warsh wants a fundamental rethink of the economic models the Fed uses, which he says wrongly focus on consumer spending as the main inflation driver. Warsh wants to see a return of monetarism, a line of thinking that says increases in the money supply can drive inflation.

— Matt Peterson

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Tech Earnings Are Right Around the Corner. All Eyes On AI.

Technology companies are gearing up for their latest batch of earnings reports, and Wall Street will be looking for proof that artificial-intelligence investments are paying off. Investors want to see how these companies are making money from AI, especially given the massive spending on the rapidly growing technology.

• Amazon.com reports the week of Oct. 21, while Apple, Microsoft, and Meta Platforms follow a week later. Rising tech valuations are fanning concerns about an AI bubble. Five of the Magnificent Seven stocks currently trade at higher forward price-to-earnings valuations than their five-year averages.
• The biggest tech companies need to demonstrate accelerating cloud revenue growth to prove they are making money off AI. This group includes Microsoft’s Azure public-cloud business, Alphabet’s Google Cloud, and Amazon.com’s Amazon Web Services. Beating expectations is an imperative for investors.
• These large tech companies have also committed to spending tens of billions of dollars to building AI infrastructure that will provide the computing power needed to accomplish major tasks. Investors will be on the lookout for capital expenditure updates.
• By the time the focus turns to tech, earnings season will be well underway. Things really kick off with the big banks next week. Optimism abounds. According to data from FactSet Research Systems, Wall Street is expecting an 8% earnings increase for the S&P 500 from a year ago.

What’s Next: The realization that trade policies won’t be as harsh as many originally feared could also be a positive. Strategists at 22V Research analyzed recent earnings conference calls and found that corporate sentiment has rebounded from a dip in the second quarter.

— Angela Palumbo and Paul R. La Monica

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Banks Face New Scrutiny Over $1.7 Trillion of Loans

The near-simultaneous collapse of two companies tied to the U.S. auto industry is shedding new light on a fast-growing part of the financial markets little known outside Wall Street. Banks are lending vast sums to companies that also provide financial services—but aren’t banks in name or in how they are regulated.

• Commercial bank loans to these so-called non-depository financial institutions rose to nearly $1.7 trillion at the end of September, up more than fourfold in a decade, the St. Louis Fed says. It makes clear the years of credit flowing outside the tightly regulated banking system and into riskier enterprises.
• NDFIs now account for some 33% of all commercial and industrial loans originated by large banks, J.P. Morgan Securities says. For years, investors cheered on the loans, content to see any loan growth for U.S. banks. But Wall Street is reassessing after Tricolor Holdings and First Brands failed.
• Tricolor, the operator of used car dealerships that is liquidating, extended credit to borrowers, and big banks lent it money to do so. Auto parts company First Brands, which is reorganizing, had complex funding arrangements with private lenders that were funded by banks.
• Jefferies-owned asset manager Point Bonita Capital lent to large First Brands customers including AutoZone, Walmart, and O’Reilly Automotive. Point Bonita’s portfolio has some $715 million tied to those companies, Jefferies said, noting it is working to determine the asset manager’s exposure to the bankruptcy.

What’s Next: JPMorgan Chase, BlackRock, Barclays, Origin Bank, Renasant, and Triumph Financial are among Tricolor’s creditors. Fifth Third Bancorp said in a recent securities filing that it expected to lose between $170 million and $200 million on its asset-backed loan to the company.

— Rebecca Ungarino

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—Newsletter edited by Liz Moyer, Patrick O’Donnell, Rupert Steiner