Investors anxious about an AI-driven stock market bubble are focusing on the wrong place, Goldman Sachs’ chief US equity strategist said.
David Kostin said on the firm’s “Exchanges” podcast published on Thursday that the bubble isn’t in the soaring share prices of Nvidia and other publicly traded AI giants.
Instead, it’s in the private-market frenzy happening far from Wall Street’s daily price discipline.
“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,” said Kostin, who is retiring at the end of the year after 31 years at the firm.
Drawing on legendary investor George Soros’s theory that rising prices often attract more capital, Kostin said private AI valuations are feeding on growth expectations rather than fundamentals.
“As these firms are raising capital, the growth rate increases. As the growth rate increases, the valuation increases,” Kostin said.
Kostin emphasized that reflexivity is just one issue. He pointed to another risk from “circular financing” or “vendor financing,” in which growth depends on outside funding that may not hold up.
“At some point, the vendor doesn’t necessarily have the same growth to be able to fund that growth,” he said.
That dynamic stands in contrast to the public market, he said, where prices and earnings have moved in lockstep.
He cited the example of AI chipmaker Nvidia, whose share price has increased by 12-fold in the last three years — but its earnings have increased by 12-fold as well.
“So pretty much the price and the earnings have matched each other,” he said.
Even broader valuation metrics don’t appear to be in classic bubble territory.
The largest companies in the S&P 500 index — many of them AI-linked — trade around 30 times earnings. That is well below the 40 times peak of the largest 10 companies in 2021 and the 50 times multiples seen during the dot-com mania, he said.
Capital-raising trends tell a similar story.
The US has seen about 55 IPOs larger than $25 million this year — a fraction of the 280 in 2021 and nearly 400 in 1999.
“There is capital availability in the public markets, but not necessarily ebullient. It’s there but not so dramatic,” Kostin said.
