AI hype is a bubble set to burst as it follows the path of tech manias throughout history, legendary investor Jeremy Grantham says

• Jeremy Grantham says AI is a stock bubble similar to past tech manias.
• He compared the hype for AI to the 1990s internet craze and 1920s railroad boom.
• He predicts a sharp drop for stocks but long-term transformative impacts from AI developments.

The market's endless hype for artificial intelligence is a classic bubble following the path of others throughout history.

That's according to veteran investor Jeremy Grantham, who foresees a difficult path ahead for the stock market as the bubble gets bigger. Losses will pile up once the bubble in AI stocks bursts, as artificial intelligence is no different from the other tech manias that temporarily blew up the stock market, he said in a recent interview with Morningstar.

"The bigger the new idea, the bigger the new invention, the more the market becomes overpriced, the more it attracts euphoria. It's not accidental," Grantham said.

Grantham compared the excitement for artificial intelligence to the dot-com era, when the internet became mainstream, as well as the 1920s, when railroads and electrification were changing everything. In the past, those tech manias led to "spectacular bubbles" in stocks, Grantham said, and AI is no different.

"Really great things happen in the internet phase, '98-'99. But they overdo it," Grantham said. "When you have these great developments, they overdo themselves in the short term, they crash in the intermediate term, and then they come out of the wreckage and change the world in the long term. And that's what I expect will happen this time," he added, though he didn't have a concrete prediction for how much stocks could decline or when the crash might occur.

Other market commentators have cautioned investors on AI, pointing to lofty valuations in the tech sector and huge spending by companies with little clarity on when that might produce a return.

David Rosenberg, one of Wall Street's most bearish economists, said the market was in the midst of a "mega-bubble" headed for a "spectacular" correction, as evidenced by indicators like a historically high price-to-earnings ratio and a high share of household stock ownership.

John Hussman, another uber-bear forecaster, said stocks looked to be the most overvalued since 1929, according to his firm's most reliable internal valuation gauge.

Grantham, too, has repeatedly warned of steep stock market losses years, with varying success in his predictions. In 2022, he cautioned investors of a multi-asset "superbubble" forming in stocks and predicted the S&P 500 could have dropped 43% from levels at that time. The benchmark index slid about 25% in 2022, but completely erased that loss in 2023 and has gained 20% this year.