Are we in a phase where investors as a whole are overexcited about AI? My opinion is yes. Is AI the most important thing to happen in a very long time? My opinion is also yes.
Sam Altman
Equity markets continued to demonstrate resilience in the third quarter, despite a backdrop of a government shutdown, heightened policy uncertainty, and lingering unease about Fed independence. The S&P 500 returned 3.65%, led by exuberance over AI-related stocks. The Nasdaq, even more tilted toward artificial intelligence, rose 5.68%. Smaller companies performed well, with the Russell 2000 up 3.11%. Bonds added stability as inflation expectations eased, and international equities rose 3.6%, with emerging markets leading the way, up 7.15%.
These numbers, while reassuring on the surface, mask a more complex reality in today’s markets. Two powerful forces are shaping the investment landscape: 1) the surge of retail investors eager to “buy the dip”, and 2) the extraordinary enthusiasm surrounding artificial intelligence, which has driven most, if not all, of recent economic and market gains.
Retail Investors: Buying Every Dip
When markets pulled back earlier this year due to tariff concerns, individual investors stepped in to buy. Their instinct to treat pullbacks as opportunities has become a defining feature of this cycle. Younger investors came of age during one of the strongest bull markets in history and have never experienced the kind of grinding bear market that shapes older generations’ memories. Trading platforms, social media, and a culture that blurs investing with entertainment have only amplified this trend.
As a result of this wave, equities now account for over 40% of household wealth in America, higher than at the peak of the dot-com boom. Consumer spending, traditionally driven by wages and credit, is now increasingly supported by portfolio gains. This creates a reinforcing feedback loop between the two: rising markets boost spending, which supports economic growth and, in turn, sustains markets. The two have become ever more intertwined, leaving the economy more vulnerable should the cycle reverse. The same wealth effect that fuels spending today could work in reverse, dragging demand lower.
AI Euphoria
No story looms larger over today’s markets than artificial intelligence. Since the debut of ChatGPT in late 2022, more than half of the gain in US equities is concentrated in just ten firms, led by Nvidia, Microsoft, and Amazon. These companies have become shorthand for the future, their market capitalizations swelling on the assumption that AI will transform entire industries.
The scale of investment is historic. America’s GDP growth has been entirely fueled by an IT investment boom. Global AI-related capital expenditures are expected to surpass $400 billion this year. Hyperscale data centers are being built at a record pace; Nvidia’s chip production can’t keep up with demand; and corporate budgets are shifting toward AI initiatives. Yet revenues remain a fraction of these expenditures. For now, the promise of AI is measured more in expectations than in profits.
The path to monetization is uncertain. Revenue growth depends on whether customers find the technology useful and worth paying a significant premium. One MIT study reports that 95% of organizations earn “zero return” on their investments in generative AI. Many are experimenting, with little evidence so far that the technology delivers durable productivity gains.
The source of funding for this technology boom is also an issue. Some of the capital flows have already taken on a circular effect. For example, Nvidia, the primary supplier of chips powering AI models, recently announced a $100 billion investment in OpenAI. This arrangement raises concerns, as Nvidia’s investment funds OpenAI’s demand for chips, while OpenAI’s purchase helps sustain Nvidia’s revenues. The chart below illustrates the integrated network of capital expenditures across the AI ecosystem. The loop is profitable for now, but it underscores how much of today’s AI boom is being driven by capital circulation rather than end demand. Adding to this risk is the rapid depreciation of chips. Hardware that is cutting-edge today can become obsolete within two years, leaving vast sums of investment exposed to write-downs.
Lessons from History
History cautions us against assuming today’s winners will remain tomorrow’s market leaders. Britain’s railway boom in the 1840s, America’s electrification boom in the 1890s, and the dot-com frenzy of the 1990s all followed a familiar pattern. Vast sums were poured into transformative technologies, valuations surged, and optimism seemed unshakable. The technologies endured, but many of the companies that led the charge vanished.
AI may follow a similar trajectory. Infrastructure built today (data centers, semiconductors, and software platforms) will shape the economy of the future. But just as the early internet’s dial-up providers gave way to broadband, or as railroad pioneers were replaced by stronger operators, the companies that dominate this moment may not dominate the next. Competition will be fierce, with new entrants emerging from startups, overseas rivals, and adjacent industries. Regulation will also play a role, as policymakers around the world are already drafting rules to govern privacy and algorithmic accountability. If those rules tighten, the cost of compliance could erode margins.
There are also practical hurdles. Training large AI models requires massive amounts of energy, raising both costs and environmental scrutiny. Questions of reliability persist, as “hallucinations” and biases continue to plague AI outputs. And for many firms outside the tech sector, the promised productivity gains remain just that: promises. History reminds us that general-purpose technologies take time to diffuse through the broader economy.
The enthusiasm around AI is understandable. It may indeed be the defining innovation of our era. But markets have a habit of overestimating what technology can deliver in the short run, while underestimating its long-term impact. For investors, the challenge is not whether to participate in this transformation, but how to do so without overpaying for today’s narrative.
Beyond the AI Trade
The excitement around AI has cast a long shadow over the rest of the market. While investors crowd into a handful of technology firms, vast segments of the market are being overlooked. The combined market value of the five largest US companies is currently worth five times that of the bottom 2,000. In fact, the market capitalization of Nvidia alone is 50% greater than the entire Russell 2000 index.
This unevenness creates opportunity. Leadership in markets rarely stays this concentrated for long. When enthusiasm narrows around a single story, other areas quietly create opportunity. For disciplined investors, these are the periods that often sow the seeds of future returns.
Closing Thoughts
Today’s story is one of optimism and imbalance. Retail investors provide resilience but also fragility; AI fuels genuine innovation but also speculation. The danger is that markets have once again priced in certainty where uncertainty exists.
We are not calling a bubble. History teaches that bubbles are only obvious in hindsight. What we are highlighting is the growing dependency of both markets and the broader economy on one theme: the assumption that AI will deliver extraordinary, immediate returns. Should sentiment shift, or should growth disappoint, the repercussions could be far-reaching.
For investors, the lesson is not to stand aside from innovation, but to participate prudently. The future of AI may well be transformative, but as Sam Altman stated, even the most important technologies can inspire excessive enthusiasm along the way. We’ll end this letter with his full quote.
When bubbles happen, smart people get overexcited about a kernel of truth. If you look at most of the bubbles in history, like the tech bubble, there was a real thing. Tech was really important. The internet was a really big deal. People got overexcited. Are we in a phase where investors as a whole are overexcited about AI? My opinion is yes. Is AI the most important thing to happen in a very long time? My opinion is also yes.
Sam Altman
As always, thank you for your trust and partnership.
Razmig Der-Tavitian, CFA, CAIA
Chief Investment Officer & Managing Partner
Evolve Private Wealth
Please let your financial advisor know if there have been any changes to your financial situation.
Evolve Private Wealth, LLC (“Evolve”) is a Registered Investment Adviser. The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. This content is intended to provide general information about Evolve. It is not intended to offer or deliver investment advice in any way. Advisory services are only offered to clients or prospective clients where Evolve and its representatives are properly licensed or exempt from licensure. Information regarding investment services are provided solely to gain an understanding of our investment philosophy, our strategies and to be able to contact us for further information. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
