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AI ‘exuberance’ risks ending in lengthy investment bust, BIS warns

Weak returns could trigger a sharp pullback in funding for tech companies that threatens the global economy

SpaceX rockets are shown on large digital screens in Times Square, with surrounding skyscrapers reflected in the glass.Allianz’s investment chief warned this week that SpaceX’s decision to launch a $25bn bond sale so soon after its IPO was a sign that markets had entered ‘bubble territory’© Angela Weiss/AFP/Getty Images

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Sam Fleming and Ian Smith in London

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Big Tech’s AI spending spree risks ending in a prolonged “investment bust” that could rattle financial markets and damage the global economy, the Bank for International Settlements has warned.

The Basel-based organisation, which advises the world’s central banks, said the prospect of worse than expected returns in the tech sector could prompt investors to rapidly curb financing for AI companies, at a time when the five biggest “hyperscalers” are expected to invest more than $1tn from 2025 to the end of 2026.

“Disappointment in returns could trigger a sudden pullback in financing and turn the capex [capital expenditure] boom into a protracted investment bust, with potential knock-on effects on financial conditions,” the BIS said in its annual economic report on Sunday, as it laid out the risks of the “current AI exuberance”.

BIS 11A2026

Capex to revenue ratio20262025202420232022202100.50.40.30.20.1Debt issuance ($bn)202620252024202320222021010050150Forecast →Forecast →Forecast →Forecast →

The warning comes amid mounting concerns over the scale of equity and debt issuance fuelling the AI revolution and the turbulence this is creating in global markets. Tech groups have flooded into the global credit market, raising hundreds of billions of dollars to fund AI projects, taking advantage of corporate credit spreads that are close to their lowest level this century.

Record-high share prices have drawn them to the US equity market too, with SpaceX’s blockbuster $86bn IPO earlier this month emblematic of roaring demand for stocks linked to the technology.

Big investors have warned that this rush to issue debt could test investors’ appetite, especially if the AI investment does not deliver an adequate return. Stock markets have been volatile since the SpaceX IPO and as investors digest growing expectations of interest rate increases by the Federal Reserve.

Allianz’s investment chief warned this week that SpaceX’s decision to launch a $25bn bond sale so soon after its IPO was a sign that markets had entered “bubble territory”.

To date, optimism about AI has provided an important tailwind to global growth, the BIS added. The report acknowledged it was possible that AI could raise productivity “significantly” over the coming decade, given the efficiency gains it can provide to companies.

But it said that historical episodes of investment booms provide “instructive parallels” — among them the expansion of canals in the 1830s, railways in Britain in the 1840s and the dotcom boom of the late 1990s.

These all had one key feature in common, said the BIS: “a genuine technological breakthrough that attracted capital in excess of what commercial returns could ultimately justify”.

It added: “These episodes ended with an eventual reversal in investment, inducing economy-wide recessions.”

BIS 11CAI

010987654321Years54321Canal maniaCanal maniaRailway maniaRailway maniaRoaring 20sRoaring 20sDotcom boomDotcom boomAIAI

A major equity market correction associated with AI could have broader implications today than in the past, the BIS added, because households have greater exposure to shares relative to their wealth and income.

Financial stability could also be endangered, given the volumes of debt being sold by AI companies to finance their investment, it warned.

While the global economy has demonstrated surprising resilience despite shocks including the US-Iran war, the economic repercussions of the near-closure of the Strait of Hormuz trade chokepoint have not fully run their course given continuing energy disruption, the BIS warned. Prior to the war, about a fifth of the world’s oil and liquefied natural gas supplies were shipped through the waterway.

“The inflationary impacts are already being felt and could prove persistent,” the BIS said.

“Perils have grown with pressure points around risks of persistent inflation, the sustainability of AI-related investments, growing financial vulnerabilities and weakening fiscal positions,” it added.

Data visualisation by Alan Smith in London

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Comment from JohnE929 1 hour ago

JohnE929

1 hour ago

If you had told my grandfather in 1890 about indoor plumbing, manufactured ice, electric light, transcontinental rail, and one day powered flight, he’d have said: “Amazing — every one of them valuable and worthwhile.” He’d have been right. A century later, we know precisely what the sustainable business model is for each. For AI, we still don’t.

That is the flaw in today’s complacency. AI is commoditizing faster than the capital backing it assumes. Everyone forgets there were thousands of electricity companies and hundreds of automakers at the dawn of those cycles — and that a technology being transformative tells you nothing about which firms, or which infrastructure, capture the return. The enthusiasm prices the long-term potential and ignores the near-term reality: not every query needs the newest, most expensive silicon. Stack the real, recurring demand against the cost of the infrastructure being built to serve it, and the unit economics do not clear current projections.

That mismatch is exactly how an infrastructure boom becomes a bust — a pattern the BIS traces straight from the Canal and Railway Manias to the dot-com collapse. The five largest hyperscalers will spend over $1 trillion on AI capex through 2026, outrunning their own cash flow and increasingly issuing debt to bridge the gap, on a winner-take-all wager that shows how far the capital cycle has drifted from product-level economics.

Now layer that overinvestment onto the plumbing the report actually warns about: a sovereign funding market where roughly 70% of bilateral dollar repo with hedge funds is transacted at zero haircut. That is not a system braced for a repricing event. It is a highly leveraged one praying it doesn’t arrive.

The BIS has handed us a pristine blueprint of the cracks in the foundation. Allocators should look past the hype, avoid the broad indices at these valuations, and extract their return from tangible, cash-generating assets with battle-tested business models. Manias always run longer than they should — which is not the same as ending well.

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Comment from Sensum communem 2 hours ago

Sensum communem

2 hours ago

The irrational exuberance surrounding AI is going to end. More than a trillion dollars has been spent with only losses and no significant benefits. It’s amazing that tech companies continue to spend vast amounts of money on a glorified search engine.

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Comment from Reagan 4 hours ago

Reagan

4 hours ago

Speaking of exuberance.....Congratulations to Canada in making it to the Round of 16

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Comment from ITO 5 hours ago

ITO

5 hours ago

(Edited)

To date, optimism about AI has provided an important tailwind to global growth,

only in the growth of bubbles

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Thread Level 1:Reply from Bandersnatch 3 hours ago

Bandersnatch

3 hours ago

Comment from Bunje 6 hours ago

Bunje

6 hours ago

NSS.

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Comment from Snamoey 6 hours ago

Snamoey

6 hours ago

Yes it's a worry. Higher leverage creates more volatility. But...the market is already starting to make its own decisions. And how many of the individuals at BIS have much real experience of the riskier end of risk. Isn't what was said obvious?

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Comment from Wannabequant24 6 hours ago

Wannabequant24

6 hours ago

(Edited)

Well I just spent my Sunday reading the actual report and while BIS does a great job laying out the risks of AI, it only glosses over the fact that hedge funds now hold over 53% of advanced economy debt aka US treasuries. Oh and they're levered to their eyeballs mainly deploying relative-value strategies. Probably stacked on the yen carry trade.

We've seen this movie before. LTCM anyone? The current tech bro quants deploying vibe coded strats are infinitely more equipped than two Nobel Prize winning mathematicians that literally invented modern options pricing theory. Oh and Japan is raising rates and we've got a hawkish FED. This definitely won't blow up the RRP market causing a financial crisis we promise!

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Thread Level 1:Reply from Badtz Maru 6 hours ago

Badtz Maru

6 hours ago

Comment from Tim Hill 6 hours ago

Tim Hill

6 hours ago

Yes but this article is every week for year now.

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Thread Level 1:Reply from Bunje 6 hours ago

Bunje

6 hours ago

Thread Level 1:Reply from Einarbb 6 hours ago

Einarbb

6 hours ago

Comment from andreasschober@yahoo.co.uk 7 hours ago

andreasschober@yahoo.co.uk

7 hours ago

(Edited)

Prof. Nouriel Roubini, the permabear from 20 years ago is now bullish!

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Comment from Adventure Capitalist 7 hours ago

Adventure Capitalist

7 hours ago

6 months, 1 year, 2 years, 5 years we all know a crash has to come and that jenga tower continues to get higher, but will the returns more than make up for it? As new tech starts creating newer science and technology that is all quite exciting. Watching all the drama and fretting happening now is also very interesting. The new emerging libertarian technocracy - this is what we need more discussion on.

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Thread Level 1:Reply from Bunje 6 hours ago

Bunje

6 hours ago

Comment from Einarbb 7 hours ago

Einarbb

7 hours ago

(Edited)

Mr. Mr. - what the real name is; appears to have adopted a side.

Per his comment near the beginning of the comment page.

He appears to proclaim China already victorious, it's dominance over planet Earth foregone conclusion already.

Ah well, I've seen before this - folks adopting a side, thinking 'em-selves adopting the obvious winner, I kinda have memories going all the way back to the Cold-War, so I'm not kidding when I say, I've seen this type of behavior before.

It was certainly possible to paint USSR an obvious winner, if persons were selective about what stats they picked, as even in that very late Cold-War period, in some stats it always had numerical superiority near right to the end.

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Comment from Muchacho 7 hours ago

Muchacho

7 hours ago

Don’t worry guys, AGI is just around the corner 🤡 and mythos is so scary that we cant actually release it to the public 🤡🤡

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Comment from Hastings 7 hours ago

Hastings

7 hours ago

It’s the common view in Europe. That everything risky is bad. The institution mentioned in the article is just one of many with the same view towards risk. And their view explains why none of the big tech or AI businesses are European.

The problem with this is, as Taleb explains, that these systems created to reduce risk makes their societies instead very fragile to reality since they can’t handle the risk and change that will always be present.

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Thread Level 1:Reply from Poulopo 7 hours ago

Poulopo

7 hours ago

Comment from Quantum AI 7 hours ago

Quantum AI

7 hours ago

(Edited)

The US kill switch on frontier models, the token shortage and significant cost increases have eliminated EU demand for US models. This 50% reduction in TAM and the lack of ROI will become apparent soon. It’s the reason the S1’s are delayed and why investors will run for the hills.

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Thread Level 1:Reply from Bunje 6 hours ago

Bunje

6 hours ago

Comment from BSRR 8 hours ago

BSRR

8 hours ago

AI is of course here to stay but will for sure coming crashing down financially. The investment vs revenue potential is seriously mis aligned.

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Comment from Dr Julius No 8 hours ago

Dr Julius No

8 hours ago

AI is an extension of one’s cognitive ability. It allows one to go beyond one’s ability. It is an accelerator and enabler, an extension of the brain tapping into the collective wisdom. It covers medical, legal, technological, financial disciplines. It enables self driving vehicles, instant translation, summarising meetings, analysing numbers. It is here to stay. Use it wisely.

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Thread Level 1:Reply from American Person 8 hours ago

American Person

8 hours ago

Thread Level 2:Reply from Fluffy Zebra Honey Pot 7 hours ago

Fluffy Zebra Honey Pot

7 hours ago

email-action-replyIn reply to American Person

Yes, if you choose to stop thinking for yourself. By this logic, you could make the same argument that reading a book turns a human into a dummy because human believes book verbatim. Mistaken ideas our parents told us hold us back more than anything.

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Thread Level 1:Reply from Sam 3 hours ago

Sam

3 hours ago

Comment from Schrodinger'sCat 8 hours ago

Schrodinger'sCat

8 hours ago

Silicon valley first took the adult world down with the social media polarizing by anonymity, loss of fact checking, and the loss of thinking time with people being run by beep beeps of cell phones and the search for likes.

Now passing on to cognitive decline for the younger generation whose neuron network is still being formed.

These folks as grown ups will show how scale is appropriate to a certain size, and beyond it declines begins.

Happens with natural kingdom, happens with empire kingdoms, happens with political parties in countries, happens with religions, happens with any collective.

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Comment from Hiawatha 9 hours ago

Hiawatha

9 hours ago

My own, simplistic answer to A-I's explosive needs for funding is that I do not need tools to "accelerate" my life's requirements to work, to be informed, and therefore to react. If I have not needed A-I's speed up in all things performed hitherto by human-beings, then, unless I am completely alone in thought, the supremos behind A-I should think again. Because, prior to A-I, peoples' thinking was having to spin too fast already. People wan t their societies to calm down, not to speed up to A-I's imaginations.

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Comment from Bbbbb12 9 hours ago

Bbbbb12

9 hours ago

(Edited)

Will be interesting to see in the future if tech/ social media/AI turns out to be a bigger problem than alcoholism

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Comment from The gardener 9 hours ago

The gardener

9 hours ago

The last chart is chilling!

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