Dalio warns: AI investment mirrors stock market bubble 25 years ago

American billionaire investor Ray Dalio has warned that the frenzy over artificial intelligence (AI) has fueled a “bubble” in the American stock market, similar to the dot-com bubble of 2000.

Dalio, co-founder of hedge fund Bridgewater Associates and one of the most influential figures on Wall Street, said in an interview with the Financial Times, “The current pricing of AI stocks has reached high levels and also faces interest rate risks, this combination could burst the bubble.”

His warning comes amid growing concerns in the market about whether the hype around AI stocks has gone too far.

Additionally, investors are wary about borrowing costs, with concerns escalating further after the Federal Reserve lowered its interest rate expectations in December 2024.

Dalio pointed out, “Our current cycle stage is very similar to that of 1998 or 1999.”

In the late 1990s, tech stock valuations soared rapidly due to low interest rates and the proliferation of the internet. Subsequently, then-Fed Chairman Alan Greenspan tightened monetary policy, triggering a sharp market correction.

Currently, the expected price-to-earnings ratio of the S&P 500 index has reached 20.25 times, similar to the level before the Fed’s interest rate cut in 1998. According to FactSet data, since early 2023, driven by stocks like AI chip manufacturer Nvidia, the stock index has doubled.

On Monday (January 27th), Chinese AI company DeepSeek shook Wall Street, causing Nvidia’s market value to evaporate nearly $600 billion, marking the largest single-day market value loss in U.S. history.

The incident was triggered by the release of DeepSeek’s R1 reasoning model, which outperformed several American open-source language models, claiming lower costs and less hardware requirements. DeepSeek’s success raised questions among investors about the potential returns of Silicon Valley companies’ investments of billions of dollars in AI data centers and raised concerns about whether Beijing has found a way to remain competitive in high-end chip exports from the U.S.

Dalio stepped down as co-chairman of Bridgewater Associates in 2021 but remains a board member. He has long advocated for stronger economic ties with China. On this, he said, “The tech competition between the U.S. and China is far more important than profits. It involves not only economic advantages but also military advantages.”

Dalio believes that to win the global AI competition, state support is inevitable, even if it means sacrificing short-term profits. He explained, “Our system is overall shifting towards a policy model more similar to an ‘industrial complex,’ which will involve government-led and government-influenced activities, because it is just too important.”

He added, “Relying solely on capitalism or profit drive is not enough to win this battle.”

As U.S. tech companies significantly increase their AI investments, President Trump promised to support America’s AI development during his second term. Under President Biden’s administration, the U.S. also provided billions of dollars in subsidies to chip manufacturing companies to encourage domestic production.

Meanwhile, Beijing has been providing financial support to the AI industry, including launching large funds and other initiatives to support the struggling semiconductor sector.

(This article is based on a report from the Financial Times)