AI Euphoria Reaches 'Visible Excess': Why Ikigai Asset Manager Warns Market Enthusiasm Is Out of Control

AI Euphoria Reaches 'Visible Excess': Why Ikigai Asset Manager Warns Market Enthusiasm Is Out of Control​

Portfolio management firm Ikigai Asset Manager has issued a stark warning regarding the current state of technology and US equities, suggesting that market expectations surrounding artificial intelligence (AI) have entered a "zone of visible excess." While dismissing an imminent market top, the PMS contends that several advanced indicators point toward levels historically associated with extreme market euphoria.

The fund emphasizes that the concern is not the potential of AI itself. There is little doubt it will transform businesses over the next decade. The critical question, however, is how much of that massive future transformation has already been priced into today's stock values.

Record Returns Compare to Major Historical Bubbles​

Ikigai points specifically to the extraordinary run in US technology stocks as a primary signal of excessive enthusiasm. Over the last decade, the Nasdaq 100 has delivered cumulative returns exceeding 640%. This performance surpasses the gains seen during Japan's equity bubble in the 1980s, the bull market of the 1920s, and the technology boom of the late 1990s.

This comparison serves as a reminder to investors that current enthusiasm has reached extreme levels, even if history is not guaranteed to repeat itself. The fund maintains that while AI's transformative power remains certain, the magnitude of its impact reflected in market prices is highly suspect.

Financial Indicators Point to Peak Market Conditions​

Multiple independent metrics are now indicating similar cautionary trends across the broader market. The S&P 500 is currently trading at a cyclically adjusted price-to-earnings (CAPE) multiple above 35 times, a valuation rarely witnessed in the past century and noted as being close to the peak of the dot-com bubble.

Market leverage has also reached record heights. Margin debt extended by US brokers has surpassed $1.3 trillion, coinciding with a sharp acceleration in retail borrowing trends. Furthermore, market concentration has intensified dramatically. The top 10 companies now constitute nearly 40% of the S&P 500 stocks.

Unprecedented AI Spending Projected to Exceed One Trillion Dollars​

Ikigai's most significant concern revolves around the massive scale of AI capital expenditure underway globally. The firm estimates that Alphabet, Amazon, Meta, and Microsoft alone will commit approximately $700 billion in capital expenditure this year, projecting figures exceeding $800 billion for next year.

When infrastructure providers like Oracle, OpenAI, and Anthropic are included, expected AI investment is projected to cross the $1 trillion mark next year. This spending level translates to roughly 3% of US GDP and about one-third of all pre-tax profits generated by non-financial US companies.

Hyperscalers Face Massive Capital Deployment Challenges​

The four largest hyperscale firms are expected to dedicate an immense amount of their operating cash flows toward capital expenditure over the next few years. Their spending is forecasted to reach almost 92% in 2026, compared to 41% spent on capital expenditure in 2023.

This high rate of infrastructure build-out carries associated costs. Roughly 28% of operating cash flow across these firms is expected to be devoted exclusively to memory this year.

The Key Risk: Questioning Returns on AI Investment​

The core risk identified by Ikigai is not a failure of AI technology, but the market's eventual willingness to sustain its current valuations. A sudden realization that hyperscalers or key AI entities may fail to generate sufficient returns on these unprecedented investments could trigger a sharp unwillingness to continue funding these endeavors.

This potential reassessment could be amplified by the financing arrangements between various suppliers and their large corporate customers. Interestingly, the initial signs of market rotation are emerging as well. The Magnificent Seven stocks have recently begun underperforming both the S&P 500 and the Russell 2000 indices.

Ikigai concludes that while these indicators do not guarantee an immediate correction, they strongly suggest that discipline must be prioritized when overwhelming optimism begins to outpace underlying financial fundamentals.