Legendary investor Jeremy Grantham has issued a stark warning that artificial intelligence represents one of the biggest investment bubbles in history, predicting it will eventually crash and drag down the broader stock market. The GMO cofounder and market historian drew parallels between the current AI frenzy and previous transformative technologies like railroads and the internet, both of which experienced devastating bubble bursts despite their world-changing potential.
In an appearance on the “Merryn Talks Money” podcast, Grantham emphasized that the most significant bubbles form around genuinely revolutionary ideas, not worthless concepts. “All the bubbles are associated with serious things, and the more serious, the bigger the bubble,” he explained. The veteran investor pointed to the release of OpenAI’s ChatGPT in late 2023 as the catalyst that generated immense buzz around AI and sparked massive capital outlays by companies, temporarily staving off an economic downturn.
Grantham highlighted what he calls the “iron law” of investing: when an asset doubles in price, the future return from holding it halves from that point forward. With markets at historic highs, he predicts correspondingly low returns ahead. “If you want to have the highest market in history, you will have the lowest returns in history going forward,” he stated bluntly.
The market historian specifically called out Big Tech companies for using their dominant market positions to boost profit margins to “excessive levels,” but insisted this won’t prevent the bubble from bursting. He predicted that Nvidia will lead the decline, with other AI-related stocks following suit, though some will eventually “inherit the world” after the crash, similar to how Amazon and other internet companies survived the dot-com bust.
Grantham also identified institutional inertia and herd mentality as key factors preventing market corrections. Industry professionals fear sounding alarms about valuations because the bubble might continue growing, causing them to underperform rivals and potentially lose clients or jobs. “As long as the music’s playing, they’re going to be dancing,” he observed.
While Grantham joins other prominent bears like Michael Burry in warning of overvaluation, bulls like Kevin O’Leary and Ross Gerber argue that AI companies’ productivity gains and profitability justify current valuations. The S&P 500 has risen approximately 80% over the past five years, continuing its march higher despite skeptics’ warnings.
Key Quotes
I think it’s obviously a bubble, and I think it’s quite a simple story.
Jeremy Grantham, GMO cofounder and veteran investor, made this direct assessment of the AI market during the “Merryn Talks Money” podcast, establishing his clear position that current AI valuations represent an unsustainable bubble.
All the bubbles are associated with serious things, and the more serious, the bigger the bubble.
Grantham explained that contrary to popular belief, the most dangerous bubbles form around genuinely transformative technologies rather than worthless ideas, which is why AI’s revolutionary potential makes the current bubble particularly large and dangerous.
If you want to have the highest market in history, you will have the lowest returns in history going forward. And it will happen this time.
The market historian invoked what he calls the “iron law” of investing to explain why current record-high valuations mathematically guarantee poor future returns for investors buying at these levels.
My guess is Nvidia will lead it down, and all the others will follow for a while, and then out of the ashes several of them will once again inherit the world.
Grantham specifically predicted that Nvidia, the dominant AI chip manufacturer, will spearhead the market decline, though he acknowledged that some AI companies will ultimately survive and thrive after the crash, similar to how Amazon emerged from the dot-com bust.
Our Take
Grantham’s warning deserves serious consideration, but the timing of bubble bursts remains notoriously difficult to predict. His comparison to railroads and the internet is apt—both technologies fundamentally transformed society, yet early investors suffered devastating losses. The critical question isn’t whether AI is transformative (it clearly is), but whether current valuations reflect realistic near-term profitability and adoption rates.
What’s particularly concerning is his observation about institutional herd mentality preventing rational assessment. When professional investors feel compelled to stay invested despite recognizing overvaluation, it creates the conditions for a sharp, disorderly correction rather than a gradual adjustment. However, unlike the dot-com era, today’s AI leaders like Microsoft, Google, and Amazon have massive existing revenue streams and profitability, potentially providing more cushion during a correction. The real risk may be concentrated in pure-play AI companies and the broader market contagion if mega-cap tech stocks decline significantly.
Why This Matters
This warning from one of Wall Street’s most respected market historians carries significant weight for investors, businesses, and the broader AI industry. Grantham has successfully predicted previous market bubbles, lending credibility to his concerns about AI valuations. His analysis matters because it challenges the prevailing narrative that AI stocks can continue their meteoric rise indefinitely.
For businesses investing heavily in AI infrastructure and capabilities, this warning suggests the need for more measured approaches and realistic ROI expectations. The comparison to the dot-com bubble is particularly relevant: while the internet ultimately transformed society, many investors lost fortunes during the crash, and numerous companies failed despite the technology’s promise.
The prediction that Nvidia will lead the decline is especially significant given the chipmaker’s central role in the AI ecosystem. A sharp correction in AI stocks could trigger broader market instability, affecting retirement accounts, institutional portfolios, and economic growth. However, Grantham’s acknowledgment that some companies will “inherit the world” post-crash suggests that AI’s long-term transformative potential remains intact—the question is which companies will survive and at what cost to investors who bought at peak valuations.