Goldman Sachs' top strategist says there is an AI bubble — but not where everyone thinks

David Kostin, Goldman Sachs' chief US equity strategist, has raised alarms about an AI bubble that investors might be overlooking. In a recent podcast episode of the firm’s “Exchanges,” Kostin pointed out that the real frenzy is not occurring in the soaring stock prices of major AI players like Nvidia, but rather in the private markets where capital is flowing unchecked. Kostin, who is set to retire at the end of this year after a distinguished 31-year tenure, expressed concern that the valuations in private markets might be unsustainable, indicating a potential bubble. He referenced the theory of renowned investor George Soros, suggesting that inflated prices attract more investments without solid fundamentals to support them. "As these firms are raising capital, the growth rate increases. As the growth rate increases, the valuation increases," he noted, highlighting a cycle that could lead to instability. In addition to reflexivity, which he described as one of the risks, Kostin warned about the dangers of "circular financing". This occurs when a company's growth is heavily reliant on outside funding that might not be sustainable. He explained, "At some point, the vendor doesn't necessarily have the same growth to be able to fund that growth." In contrast to the private sector, Kostin pointed out that public markets have shown a more stable relationship between prices and earnings. He cited Nvidia's remarkable performance, where its stock price has surged twelve-fold over the past three years, paralleled by an equal increase in earnings. Moreover, he mentioned that key valuation metrics do not indicate the classic signs of a bubble. The largest S&P 500 companies, many of which are involved in AI, currently trade at around 30 times earnings—substantially lower than the 40 times peak seen in 2021 or the 50 times multiples during the dot-com era. Capital-raising activity also reflects a more cautious environment, with only 55 IPOs exceeding $25 million this year, a stark contrast to the 280 in 2021 and nearly 400 in 1999. "There is capital availability in the public markets, but not necessarily ebullient. It's there but not so dramatic," Kostin concluded, urging investors to keep a closer eye on the less visible dynamics of private market investments.