Jeremy Grantham, the GMO co-founder known for having warned about earlier market bubbles, warns that an AI bubble has made US stocks more expensive than ever in American history, and that this could lead to a drop of up to 70%.
The experienced strategist spoke on CNBC, and his main advice was clear. He urges investors to step away from US stocks and instead look to other markets.
An AI bubble at record highs
Grantham says the market's price-to-earnings ratio has, on average, been more than 60% higher since 2010 than it was in the previous century. He links this premium to many years of cheap capital. He does not dispute that AI is transformative. Instead, he believes that the near-universal faith in the technology has led to a dangerous overinvestment, reflecting rising AI-bubble fears on Wall Street.
His bubble model suggests that all past speculative extremes eventually revert to the trend. A return to those levels, he says, implies a drop closer to 70% than 50% for the biggest winners. The timing, he admits, could occur between two weeks and two years from now.
Grantham warned about the dot-com peak in 2000 and warned about a US housing bubble in 2007. This track record carries weight, even though his big bubble warning in 2021 came early, as stocks rose before falling in 2022. He isn’t alone now, as investor Ray Dalio has flagged similar liquidity-related risks.
Why crypto investors are paying attention
A 70% drop will not only hit the stock market. Bitcoin (BTC) is now trading like a technology stock, so a strong risk-off move is likely to hit crypto first and hardest.
The strain is already visible. US spot Bitcoin ETFs had a record 30-day outflow of $6.35 billion through mid-June, according to Galaxy Research.
Bitcoin was near $59,663 during the pullback. Grantham, for his part, rejects crypto, reiterating his view that the token is worthless and headed toward zero.
His recommendation is foreign stocks, bonds, and precious metals rather than expensive US companies. Not everyone shares this concern.
Bulls point out that today’s AI leaders actually have real revenue, unlike many companies during the dot-com period. US Federal Reserve Chair Jerome Powell has called AI investments real economic activity, not pure speculation.
“I won’t mention specific names, but they actually have earnings… These companies actually have business models, revenues, and that kind of thing. So it’s really something else [than the dot-com era],” he said.
Whether Grantham is early or right, his experience suggests that few will completely ignore the warning.
For crypto holders, the key point is that Bitcoin’s fate now largely depends on how long the AI trade lasts. The upcoming AI results will test how much of the optimism is justified.