UPDATE: Goldman Sachs’ chief US equity strategist, David Kostin, has issued a stark warning regarding the state of artificial intelligence (AI) investments, revealing that the true bubble is forming in private markets, not in public stocks. In a compelling episode of the firm’s “Exchanges” podcast released Thursday, Kostin emphasized that while public AI stocks like Nvidia have shown strong earnings growth, private AI firms are experiencing unsustainable valuations driven by excessive capital inflows.
Kostin, who is set to retire after 31 years at Goldman Sachs, stated, “I believe in the private markets, the availability of capital, the price is probably unsustainable, which one could take as a synonym for a bubble.” This alarming assessment highlights a significant shift in investor focus. Many are concerned about the skyrocketing prices of public AI stocks, yet Kostin argues the real danger lies beyond Wall Street’s rigorous price discipline.
He elaborated, referencing the investment theory of George Soros, that rising valuations in private markets are primarily fueled by growth expectations rather than solid fundamentals. “As these firms are raising capital, the growth rate increases,” he explained. However, he warned that this dynamic creates a precarious situation, as “circular financing” may lead to a breakdown of growth expectations if outside funding dries up.
Kostin contrasted the private market frenzy with the stability of public stocks, citing that Nvidia’s share price has surged 12-fold over the last three years, mirroring its earnings growth. He noted, “So pretty much the price and the earnings have matched each other,” which indicates a healthier market condition compared to the classic bubble scenarios of the past.
Further emphasizing his point, Kostin pointed out that the largest companies in the S&P 500, many of which are AI-related, trade at around 30 times earnings, significantly lower than the peak multiples of 40 times seen in 2021 and 50 times during the dot-com era.
The current capital-raising environment also reflects this trend. Only 55 IPOs exceeding $25 million have been launched in the U.S. this year, a stark contrast to the 280 IPOs in 2021 and nearly 400 in 1999. Kostin noted, “There is capital availability in the public markets, but not necessarily ebullient.”
As investors navigate this complex landscape, the implications of Kostin’s insights will be critical for those involved in both public and private AI sectors. The distinction between healthy growth and an unsustainable bubble could define investment strategies moving forward.
Watch for further developments as more investors and firms react to these assessments and adjust their strategies accordingly. The urgency of understanding where the real risks lie in AI investment has never been more pronounced.
