Is the AI Bubble Too Big to Fail?

On Wednesday, analysts bemoaned Nvidia’s lackluster Q2 earnings. The company posted a 56 percent gain in sales, its smallest in more than two years, despite the chipmaker’s positioning as one of the biggest winners of the AI boom. The company’s inability to live up to its expectations has reignited fears of an AI bubble on the precipice of rupture. Despite Silicon Valley throwing hundreds of billions of dollars into its most speculative gamble yet, the revolutionary promises, and more important, profits, of AI have yet to materialize. OpenAI is expected to lose money this year, even as its revenue exceeds a projected $20 billion. Meta’s CFO told investors, “We don’t expect that the genAI work is going to be a meaningful driver of revenue this year or next year,” despite the company dropping upwards of $70 billion on its AI investments this year. A recent MIT study found that U.S. companies have invested between $30 billion and $40 billion into generative AI tools but are seeing “zero return” from AI agents. Some fear that all of this could presage a collapse bigger than the dot-com bust of the early 2000s. As Apollo Global Management’s chief economist warned in a recent investor’s note, big tech firms are driving the market with valuations more bloated than they were in the 1990s. This would be scary for big tech companies—except many of them, according to several researchers who spoke to Inc., are already too big to fail, thanks to how closely the industry has become intertwined with our economy and government. The leading AI companies believe “the only way for this technology to exist is to be as big as possible, and the only way for it to get better is to throw more money at it,” says Catherine Bracy, CEO of the policy and research organization Tech Equity. That need for money and investment has spurred an industry lobbying blitz, pushing everyone from OpenAI CEO Sam Altman to VCs like Andreessen Horowitz into the halls of Congress over the past couple of years. Just earlier this week, The Wall Street Journal reported that Andreessen Horowitz and OpenAI are behind a nascent lobbying campaign through a super PAC network that’s already amassed $100 million to elect AI-friendly candidates. Those beltway relationships appear to be paying off. Currently, more than 30 states offer tax incentives for data center construction. But the booming growth of the industry has been enormously costly, largely owing to the vast amounts of energy needed to run large language models. The Trump administration’s AI Action Plan frames the industry’s growth as essential to “human flourishing” in the U.S. and the country’s continued geopolitical dominance. “We’re now locked into a particular version of the market and the future where all roads lead to big tech,” says Amba Kak, co-executive director of the AI Now Institute, which studies AI development and policy. Indeed, the success of major stock indexes—and perhaps your 401(k)—is resting on the continued growth of AI: Meta, Amazon, and the chipmakers Nvidia and Broadcom have accounted for 60 percent of the S&P 500’s returns this year. But ultimately, in the event of a market reckoning, it’s likely that the biggest companies would remain relatively unscathed. “AI is too big to fail in the United States, both because of how intertwined it has become with the government, and also because of how much AI investment is propping up the stock market and the entire economy,” says Daron Acemoglu, an economist at MIT. When the bubble pops, it’s likely going to be the smallest AI businesses, those riding the AI hype train with products based on existing LLMs, that’ll get wiped out in an eventual rupture. “Those little companies are not going to get bailed out,” he argues. Hardware companies like Nvidia or big tech firms, with diverse revenue streams, are likely to be better insulated from the potential fallout of the bubble popping. As Timnit Gebru, a former Google AI researcher and founder of the Distributed AI Research Institute, puts it, a chipmaker like Nvidia is essentially just selling shovels during a gold rush. “Shovels are still useful with or without the gold rush,” she says. BY SAM BLUM @SAMMBLUM