IMF economist warns: AI hype could lead to $35 trillion crash

One of the world’s most influential economists is once again sounding the alarm about the direction of the financial markets. According to her, signals are mounting that the strong stock market rally of recent years is not sustainable. She believes that the sky-high valuations of artificial intelligence (AI) companies make the market particularly vulnerable.

AI hype may drive market bubble

According to Gita Gopinath, former chief economist of the International Monetary Fund (IMF), it is only a matter of time before the bubble in the financial markets bursts. She says the world has become “dangerously dependent” on US stocks. Households and foreign investors would be particularly hard hit in the event of a crash.

Stock markets worldwide recently recorded new record levels: the Nasdaq Composite rose to almost 23,120 points, while the S&P 500 touched 6,764 points. The AEX is also performing strongly and reached its highest level ever this month: 968.73 points.

Gopinath predicts that a stock market correction similar to the dot-com crash of 2000 could lead to losses of around $35 trillion worldwide. According to her, American investors could lose approximately $20 trillion in assets, which amounts to almost 70 percent of US GDP in 2024. For foreign investors, the potential damage is $15 trillion, which is almost a fifth of global GDP outside the US.

However, according to Gopinath, the situation is more serious than at the beginning of this century. By comparison, in the dot-com crash, foreign investors lost approximately $2 trillion, or about $4 trillion in today’s value. The increased globalization of capital flows increases the risk that a US crash will cause global damage.

AI companies could fail en masse

The economist points to artificial intelligence (AI) as a major risk factor. Tech companies are investing hundreds of billions of dollars in AI, with no clear signs of how those investments will pay off. For example, OpenAI announced plans for investments of up to $850 billion, while Meta wants to spend around $600 billion on AI infrastructure by 2028.

There is a fierce race in which companies do everything they can to maintain their lead. Whoever is the first to achieve a breakthrough in advanced AI can conquer an enormous position of power, not only financially, but also geopolitically.

The worrying thing is that AI currently yields little for companies. For example, OpenAI is currently running at a loss. According to the Financial Times, an operating deficit of $7.8 billion is expected in 2025, despite revenues of $4.3 billion in the first half of the year.

Gopinath concludes with a warning and advice. Investors should prepare for a scenario in which technology stocks, and especially AI companies, which now represent 44 percent of the S&P 500, fall in value.

She recommends diversifying and parking some of the assets in traditional safe havens such as gold, which is performing unprecedentedly this year and is up 65.50 percent.