The AI boom is wobbling, but the bubble hasn't burst

Stock markets have made a hesitant recovery from a technology sell-off earlier this week, amid debt-funded AI spending as the US Fed turns hawkish over interest rates. South Korea's benchmark stock market index Kospi made an unconvincing bounce after a gravity-defying drop, a sign of volatility in the stratospheric climes of semiconductor trade.

AI hyperscalers, including Elon Musk's SpaceX, which listed recently, are tapping the bond market to raise capital. US inflation has raised expectations of at least one interest rate hike this year, based on initial comments made by new Fed chair Kevin Warsh.

These fears may be overdone, because oil prices are retreating, and fear premium on the dollar should abate. Uncertainty over the still-wobbly US-Iran peace deal is likely to subside as clarity emerges over nuclear inspections and control of the Strait of Hormuz.


This week's market movement is seen as a technical correction against the heated debate over an AI bubble. High-profile AI stocks have seen parabolic runs, and effects have spread to chipmakers in Taiwan and South Korea. Businesses are realising that costs of deploying AI are high. Physical constraints, such as electricity grid and data centre capacity, are showing up (see accompanying articles on strain on water resources). Yet, leading AI companies are generating enormous cash flows. And AI represents an inescapable technology shift.

The market volatility would suggest that the AI bubble - if, indeed, it is one - is still in the boom stage, far removed from the euphoria and panic that signal an impending crash. Interest rates are a concern for asset price bubbles. But they need to harden to threaten a foundational technology such as AI.

Concentration of investor interest in AI infrastructure poses some challenges to Indian equities, which do not offer any defined theme. There is a flip side to this. Corrections in the AI trade balance out valuations and offer alternative investment themes. India may be able to weather rising instability in AI investment from a distance.