UPDATE: Goldman Sachs’ chief US equity strategist, David Kostin, has issued a startling warning that the real AI bubble is not in public stocks but in private markets. This revelation comes amid growing investor anxiety about soaring share prices of AI giants like Nvidia.
During the firm’s “Exchanges” podcast released on Thursday, Kostin highlighted that private AI firms are experiencing unsustainable valuations due to excessive capital inflows and inflated growth expectations. He stressed that while public AI companies like Nvidia have shown price increases aligned with earnings, private entities are entering dangerous territory.
“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,” warned Kostin, who is set to retire after 31 years at Goldman Sachs. He pointed to the concept of reflexivity, as described by legendary investor George Soros, where rising prices attract more capital, creating a cycle of inflated valuations based on anticipated growth rather than solid fundamentals.
Kostin elaborated that as private firms raise capital, their growth rates surge, further escalating their valuations. However, he cautioned against “circular financing,” where growth is heavily reliant on external funding that may not be sustainable over the long term. “At some point, the vendor doesn’t necessarily have the same growth to be able to fund that growth,” he explained.
In stark contrast, Kostin noted that public markets exhibit stability, with prices and earnings moving in tandem. He referenced Nvidia’s remarkable growth, stating that its stock price has increased by 12-fold in the past three years, perfectly mirroring its earnings growth of 12-fold.
The overall market metrics also suggest that significant bubbles are unlikely in public markets. The largest companies in the S&P 500, many associated with AI, are currently trading at around 30 times earnings. This figure is notably lower than the peak multiples of 40 times seen among the largest 10 companies in 2021 and the staggering 50 times during the dot-com bubble.
Capital-raising trends further support this narrative. The US has recorded approximately 55 IPOs exceeding $25 million this year, a stark contrast to the 280 IPOs in 2021 and nearly 400 IPOs in 1999. Kostin remarked, “There is capital availability in the public markets, but not necessarily ebullient. It’s there but not so dramatic.”
As investors digest this analysis, the implications are clear: the focus should shift from public AI giants to the increasingly volatile private market landscape. The future of AI investment may depend on recognizing where the real risks lie.
Stay tuned for further updates as this story develops.
