Veteran investor Jeremy Grantham says AI is 'obviously a bubble' — and it could tank the stock market when it bursts

• Jeremy Grantham warned that AI is a historic bubble that's likely to tank the market once it pops.
• The veteran investor compared the AI boom to the internet and railroad manias of the past.
• The "probabilities that AI will not bust are slim to none," Grantham said.

Jeremy Grantham says AI is one of the biggest bubbles in history — and it's likely to tank the stock market when it bursts.

"I think it's obviously a bubble, and I think it's quite a simple story," the veteran investor and GMO cofounder said during the latest episode of the "Merryn Talks Money" podcast.

Grantham compared AI to the railroad and the internet, two world-changing inventions marked by early investment bubbles which, when they popped, "brought the economy to its knees for a year or two" and "everybody lost their money."

Contrary to common belief, "bubbles don't occur when there's some crummy idea that gets touted," Grantham said. "All the bubbles are associated with serious things, and the more serious, the bigger the bubble."

Grantham emphasized the "iron law" that when an asset doubles in price, the return from holding it halves from that point forward.

"If you want to have the highest market in history, you will have the lowest returns in history going forward," he said. "And it will happen this time. And my guess is after a while, sooner or later, the market will become a whole lot cheaper."

Bubble breakdown

Grantham, who had predicted an epic market crash four years ago, said the release of OpenAI's ChatGPT in late 2023 generated immense buzz around AI and sparked major capital outlays by companies, ultimately staving off an economic slump.

The market historian said that Big Tech companies have used their dominant market positions and influence to boost their profit margins to "excessive levels," but that won't stop the bubble he sees from bursting.

The "probabilities that AI will not bust are slim to none," he said. "It meets every condition of the railroads and the Internet. It's a powerful idea that's attracted everybody's money."

"And so my guess is Nvidia will lead it down, and all the others will follow for a while, and then out of the ashes several of them will once again inherit the world," he said.

Grantham also flagged institutional inertia and herd mentality as factors preventing the market from coming to its senses.

Put differently, industry professionals aren't sounding the alarm on valuations out of fear that the bubble will keep growing and they'll underperform their rivals, hurt their reputations, and lose clients or even their jobs.

"They all look around nervously at each other, but they keep going," he said. "As long as the music's playing, they're going to be dancing. Doesn't matter that they know the market is silly."

Bears and bulls

Grantham is one of several high-profile investors, including Michael Burry of "The Big Short" fame, who have warned AI stocks are overvalued and predicted a market downturn is coming.

Yet the US stock market has continued to march higher in spite of the skeptics, with the benchmark S&P 500 rising around 80% over the past five years.

"Shark Tank" investor Kevin O'Leary and tech investor Ross Gerber dismissed comparisons between the AI boom and dot-com bubble in interviews with Business Insider last fall.

O'Leary said "you actually can see the productivity and measure it on a dollar-by-dollar basis," while Gerber said today's valuations are warranted as AI companies have enormous growth potential and their profitability is "just insane."