The AI Bubble’s Dark Cycle: A Rolling Sequence of Misallocations

Dhaval Joshi’s contrarian take on the AI bubble has sparked debate, but a closer look reveals a more nuanced reality. Instead of a single catastrophic collapse, we’re witnessing a pattern of rapid inflation and deflation that’s leaving investors bewildered.

This phenomenon isn’t limited to tech stocks or silver prices; it’s a broader trend that’s been building for years. The term “AI bubble” has become a catch-all, encompassing everything from software-as-a-service (SaaS) to semiconductors. But what drives this cycle of misallocations? Is it simply price discovery, or is there something more insidious at play?

Joshi’s chart illustrates the rollercoaster ride of AI-related stocks, where investors initially rallied on the promise of productivity gains, only to crash when reality set in. The software boom turned bust, and with it, the SaaS sector. Silver prices spiked due to its perceived value as a conductor for data centers, but this “bubble” was short-lived. Semiconductors have seen their fortunes rise and fall as investors reassess the “moats” around chipmakers’ profits.

These misallocations aren’t isolated incidents; they’re part of a larger pattern. The market is rapidly reevaluating winners and losers, with an amplitude that’s striking. When profits are made (or lost) in weeks or months, rather than years, it’s clear that something has gone awry.

The silver example stands out as particularly egregious. Prices tripled on speculation, only to collapse when reality set in. This isn’t fundamental reassessment; it’s narrative contagion – a brief mania that spreads rapidly before dying down. This phenomenon isn’t limited to equity markets; the misallocation is real-time, with investors making educated guesses about which inflations will pop next.

The cyclical nature of these reinflations has so far prevented a correlated selloff, but what’s next? Will it be AI-related stocks again, or something entirely new? The investment community is divided, with some warning of an impending crash and others still bullish on the sector. Jamie Dimon, the mayor of Wall Street, has repeatedly voiced concerns over elevated valuations, while Bank of America Research’s Global Fund Manager survey names “AI equity bubble” as the top tail risk.

Investors must consider whether overspending is rational or just a product of narrative contagion. Joshi’s former firm, BCA Research, has sent mixed signals, upgrading equities on the logic that AI capex drives markets forward while warning of a potential blow-off rally in AI-related stocks.

The peak of AI capex is expected to be late 2026 or early 2027, but with profit margins premised on “stratospheric and unsustainable” levels, it’s clear that investors are taking a risk. Highly accommodative monetary policy has fueled this bubble, making it even more vulnerable to collapse.

Joshi’s rolling sequence of bubbles offers a testable pattern for investors to follow. As we navigate these turbulent waters, one thing is certain: the AI bubble’s dark cycle will continue to play out until its next iteration. Whether it’s tech stocks or silver prices, the market will keep reevaluating winners and losers – but with an amplitude that’s increasingly alarming.