Global markets are navigating a confluence of risks this week, with renewed geopolitical concerns in the Middle East threatening to unravel recent investor confidence. Fragile peace talks between the US and Iran paused abruptly, coinciding with reports of Iran again closing the Strait of Hormuz and escalating tensions following Israeli actions in Lebanon. This instability prompted former US President Donald Trump to warn of global economic “bedlam” if oil reserves run low, a prospect that could particularly impact oil-importing nations, including Australia.
Adding to the unease is a growing chorus of warnings regarding the artificial intelligence boom, which has largely underpinned market rallies, including the S&P 500 and MSCI World Index. Jeremy Grantham, co-founder of Boston-based fund manager GMO, which manages investment funds for clients, has built his career spotting market bubbles. He describes the current AI surge as potentially the biggest financial bubble in history. Grantham notes that the “magnificent seven” tech giants are rapidly transforming from asset-light entities into asset-heavy competitors, pouring trillions into AI infrastructure.
Goldman Sachs estimates indicate hyperscalers will spend US$5.3 trillion ($7.6 trillion) on AI and data centres by 2030. This enormous investment is reflected in surging AI-related debt, which Morgan Stanley estimates reached nearly US$236 billion as of May 31, four times higher than last year. The challenge lies in generating sufficient revenue to support these borrowings. With AI companies shifting pricing models, user costs are rising, potentially hindering the sector’s ability to deliver the productivity gains needed to justify its massive debt loads and secure returns on investment.
Grantham’s key bubble signal is market splintering, where the S&P 500 continues to rise while the median stock struggles. Data from Apollo Global Management chief economist Torsten Slok shows AI-related stocks are almost solely responsible for the S&P 500’s gains this year, with nearly all other sectors, bar energy, declining. This convergence of escalating AI debt concerns and rekindled Middle East instability creates a challenging outlook, putting the recent “risk-on” market sentiment under considerable pressure.
