Are we in a financial bubble?

Financial bubbles are notoriously difficult to define in real time — until the moment they burst. To say with any conviction whether we are in one now, one must understand the magnitude and intensity of today’s AI investment boom, as well as the timing of the potential bubble’s end.

There are at least four ways to determine when a bubble is building in financial markets. The first is to look at valuations. Even when conventional valuation metrics such as price-to-earnings (PE) ratios reach excessive levels, the market might excuse this by focusing on new metrics to justify overvaluations.

For much of the past 25 years, the average PE ratio across the S&P 500 has been 16x, whereas now it is 25x. But this increase can be justified by focusing on the potential for new productivity gains fro