'I think time is running out': How to survive a market bubble

When it comes to the massive sums that Big Tech companies are spending on artificial intelligence infrastructure and the influence that is having on stock markets, Philip Petursson is of two minds.

On the one hand, the chief investment strategist at IG Wealth Management Inc. is not quite ready to declare it a bubble — at least not the kind on the verge of spectacular collapse. On the other, he thinks it would be “irresponsible” to rule out the possibility.

“The question is: How big is that bubble today, and how much more potential is there before the risk of it bursting, if at all, emerges?” Petursson said.

Petursson has staked out some middle ground in a debate that has been hanging over equity markets for much of the past year. Despite trade war uncertainty, U.S. stocks enjoyed their third straight winning year, with the S&P 500 up about 17 per cent and the tech-heavy Nasdaq up about 22 per cent, driving their three-year returns to approximately 79 per cent and 123 per cent, respectively. The persistence of those gains, the lofty valuations they’ve created and the concentration of gains in the tech space have sparked disagreement about whether investors are staring down a frothy market or the dawn of a sustainable artificial intelligence era that could drive stocks even higher. It’s a combination that is making 2026 a particularly difficult year to plan for.

“We are seeing those massive hockey-stick parabolic curves,” said Nicholas Mersch, a portfolio manager at Purpose Investments. “(ChatGPT creator) OpenAI essentially didn’t have a product three years ago, and now they’re on a US$20 billion revenue run rate, so this is really the step function growth that we haven’t seen in a very, very long time.”

Mersch said that despite the growth, there are valid concerns for investors about the rise of AI and how it is being funded. Morgan Stanley strategists have said they expect tech companies to take on as much as US$1.5 trillion in debt by 2028 to finance the infrastructure such as data centres they will need.

“There’s more debt in the ecosystem now,” Mersch said. “The net issuance of debt, on a year-to-date basis, has been the highest out of any most recent history that we’ve seen.”

Circular financing is another concern, where one company, for instance Nvidia Corp., makes an investment in OpenAI and OpenAI then buys Nvidia’s products, potentially creating artificial demand, inflating valuations.

David Rosenberg, founder and president of Rosenberg Research & Associates Inc. is one of those who believes the S&P 500 is in a classic price bubble, one tied to investor behaviour and the reaction to the shift in the technology curve.

“Everybody is in the same trade at the same time and the sentiment is as wild as the valuations are,” Rosenberg said. “Nobody took chips off the table this cycle and diversification became a dirty 15-letter word.”