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GMO warns AI valuations resemble classic bubble, advises cautious approach

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  Published in Stocks and Investing on Saturday, November 29th 2025 at 1:12 GMT by Insider

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GMO warns AI is a classic investment bubble – here’s what to buy instead

GMO, the research and strategy arm of the financial services company Global Macro Opportunities (GMO), has warned that the recent surge in valuation for artificial‑intelligence (AI) firms resembles a classic speculative bubble. In a detailed commentary posted on the MSN Money site, GMO’s chief investment strategist, Mark W. Mazzetti, argues that while AI remains an important technology, the market’s fervor has outpaced fundamentals, creating an environment ripe for a pullback. The piece also offers a contrarian portfolio thesis—focusing on defensive, high‑quality assets that have historically performed well in downturns.

1. Why AI is “just a bubble”

The article opens by noting the explosive rise in the valuation of AI‑centric companies over the last 12‑18 months. IPOs such as Snowflake, Palantir, and the rapid appreciation of AI‑chip makers like NVIDIA have fueled the belief that the AI revolution will be a silver‑bullet for investors. GMO stresses, however, that many of these firms lack the track record, cash flow, and proven business models that typically underwrite sustainable long‑term growth.

Key points the strategist makes:

Mazzetti compares the AI boom to the dot‑com bubble, arguing that both periods were driven by a “belief” that the technology would unlock instant, massive returns, even when the underlying economics were shaky. He points out that many AI companies are not yet profitable, and those that are rely heavily on expensive data and research labs—a fragile business model if investors pull back.

2. The classic bubble signals

The article lists several “red flags” that investors should watch for when assessing an AI‑related investment:

1. Excessive price‑to‑earnings ratios – The average P/E for the AI‑sector has risen from around 30 to over 50 in a year.
2. Heavy reliance on venture capital – Many AI firms have not yet turned their VC financing into sustainable earnings.
3. Over‑optimistic growth projections – Management often projects “gigantic” revenue trajectories with little historical precedent.
4. Limited diversification – A few companies dominate the sector, leaving little room for competition.
5. High leverage – Many firms carry significant debt that would amplify a downturn.

Mazzetti emphasizes that, historically, bubble bursts in technology sectors have been accompanied by sudden market corrections that wipe out the higher multiples.

3. What to buy instead

Having laid out the cautionary case, the article turns to GMO’s “what to buy” thesis. Rather than chasing AI hype, the author recommends a portfolio that balances growth with resilience. The key categories are:

GMO underscores that the “buy‑and‑hold” style of these assets has historically provided a cushion against the kind of sudden downturns that bubble‑fueled sectors can experience. He also suggests maintaining a “cash buffer” (10‑20% of the portfolio) to seize opportunities that arise when the market corrects.

4. Additional context and supporting links

The MSN article contains several hyperlinks to GMO’s deeper research that reinforce the points made above:

1. GMO Research – “AI is Not a Bubble”
   This in‑depth blog post examines the fundamentals of AI firms in detail, providing earnings‑growth tables and valuation analysis. It also includes a comparison with the dot‑com era, highlighting similarities and differences.

2. GMO Research – “What’s Next After the AI Surge?”
   A forward‑looking piece that maps out potential catalysts for a market correction, such as regulatory changes, technology hurdles, or shifts in consumer behavior.

3. Global Macro Opportunities – “Risk Management in Tech Investing”
   An advisory note outlining strategies for protecting a portfolio against over‑exposure to speculative technology sectors. It recommends diversification, position sizing, and stop‑loss tactics.

4. MSN Money – “How to Invest in Defensive Sectors”
   An explanatory guide that walks investors through selecting the right ETFs and mutual funds for defensive positions. It includes performance charts and expense‑ratio comparisons.

By following these links, investors can dig deeper into the data behind GMO’s assertions, verify the numbers presented, and gain a more comprehensive understanding of the broader macro environment.

5. Bottom line

GMO’s article serves as a timely cautionary reminder that while AI is poised to reshape industries, the market’s current valuation of AI‑centric firms is likely inflated. The author urges investors to steer clear of speculative bets and instead focus on a diversified, defensive core that can weather a potential bubble burst. The suggested asset mix—broad market indices, consumer staples, healthcare, infrastructure, dividend aristocrats, and a cash buffer—provides a pragmatic framework for building resilience while still maintaining upside potential.

Whether you’re a seasoned portfolio manager or a retail investor, GMO’s piece encourages a measured, data‑driven approach to AI investing: don’t let hype override fundamentals, and keep your eye on long‑term, sustainable value creation.