AI Finance Bubble fears

Vendor financing could be supporting investment in AI along with AI -related bonds.

 

 

Last week, leading artificial intelligence (AI) chipmaker NVIDIA became the first company to hit a stock market valuation of $5 trillion. That is more than 50% greater than the combined value of the UK’s leading 100 companies!

Separately, NVIDIA also announced that it is taking a $1 billion (3%) stake in former dot-com telecoms champion, Nokia, forming a strategic partnership to develop ‘next generation’ 6G telecoms technology.

While the growth of AI has been incredible so far, concerns are being raised about the valuation of some AI companies, given their sheer size and, as in some cases, growth is being funded by a form of vendor financing.

Vendor financing is a commercial arrangement where a company provides financial support to a customer buying its products, often enhancing the relationship between the parties, such as would appear to be the case with the Nokia transaction.

Vendor financing appears to be taking off in the world of AI in a big way!

ChatGPT developer OpenAI now has a value of over $500bn. Recently, OpenAI announced a commercial tie up with US chip makers. In return for purchasing NVIDIA computer chips, NVIDIA will invest up to $100bn in OpenAI for a non-controlling stake. OpenAI’s deals with Oracle, NVIDIA and AMD have created $100bn of paper value, but it remains loss-making, so is relying on its vendors to fund its capital expenditure (capex). For them alone, these commitments are now thought to be approaching $1trillion. With Microsoft no longer providing the financing it is becoming harder for OpenAI to find investors to fund the $100bn of expected losses before it gets to break even, let alone the capex required!

Vast sums are being spent on the development of AI. Last week, Meta (the owner of Facebook) announced a $30bn bond sale aimed at supporting the growth of its AI business and infrastructure. So far this year, US companies have reportedly issued more than $200bn worth of bonds to finance AI infrastructure projects.

Vendor financing can only go so far, even for the likes of NVIDIA. No wonder that some parties such as the Bank of England and the IMF have recently warned of an AI bubble developing, akin to the dot-com bubble 25 years ago.

If the AI bubble were to burst what would this do to the US economy? This is difficult to quantify as the AI boom is driving a wide range of supporting services from datacentres to nuclear energy. However, it is thought that in the first half of 2025 that AI capex contributed over 1% to US GDP growth, greater than the US consumer as the foundation of economic expansion. This is equivalent to 40% of total US GDP growth this year – so any disruption would be material. For now, the euphoria over AI in the US shows no sign of abating but the AI vendor financing does raise eyebrows and does not look sustainable. Revenues for some of the AI business models such as OpenAI need to turn up quickly.

What have we been watching?

The AI boom continues as noted above, with Nvidia becoming the first company to hit a stock market valuation of $5trillion. NVIDIA’s value is now bigger than the market value of every G7 country except the US and Japan! NVIDIA’s shares were boosted by comments from Trump, who said that he planned to discuss NVIDIA Blackwell chips with Xi Jinping.

A US interest rate cut by the Federal Reserve (Fed), good results from NASDAQ heavyweights Alphabet and Amazon and a seemingly upbeat trade meeting between Trump and Xi Jinping helped propel US equities to another record high.

In a much-anticipated meeting, Trump met Xi Jinping in South Korea to discuss trade with both leaders expressing optimism about alleviating trade tensions between the two largest economies in the world. Trump told reporters that the meeting culminated in a trade agreement that would see the US reduce fentanyl-related tariffs on Chinese goods by half, effective immediately. Additionally, the agreement will allow China to resume soybean purchases. China will suspend its rare-earth export controls for a minimum of one year and has removed its 10%-15% retaliatory tariffs on various US agricultural products. Trump also suggested that the one-year trade deal will be reviewed annually.

One of the big events this week is on Wednesday, when the US Supreme Court will hear arguments regarding the Trump administration’s IEEPA tariffs, which account for about half of tariff revenue collected in 2025. Two lower courts have ruled these tariffs illegal. The Supreme Court ruling could have a significant impact on the US fiscal outlook. Trump will no doubt pursue alternative measures should he lose.

 

In the UK, the Budget uncertainty continues to overhang economic activity. The latest rumour to circulate is that Chancellor Rachel Reeves might increase the basic rate of income tax by 1p or 2p which, would raise between £8bn-£20bn. 

 

The European Central Bank (ECB) kept interest rates on hold at 2% as widely expected given the uncertainty surrounding tariffs.

 

In the US, the Fed cut interest rates by 0.25% to 3.75%-4% as expected. However, Fed Chair Jerome Powell was more equivocal on future interest rate cuts, saying that ‘a further reduction in the policy rate at the December meeting is not a forgone conclusion, far from it.’ He also suggested ‘strongly differing views’ within the Fed committee with some concerned about a slowing labour market but others warning about still elevated inflation. The Fed also said that it will end its balance sheet run off (QT) in December. Meanwhile, the US government shutdown will become the longest in history by midnight tomorrow although there is growing speculation that we may be nearing the end given increased party dialogue. For now, it continues to delay the publication of key US economic data.

 

The Bank of Japan kept interest rates on hold at 0.5%, as widely anticipated. It trimmed its economic growth forecast for the current fiscal year from 0.7% to 0.6% and raised its inflation forecast, predicting it will reach 2% by the end of March 2027.

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Brent oil eased back to $65 following the upbeat trade meeting between Trump and Xi Jinping.

Finally, it was reported last week, that almost 44p in every £ invested by UK savers is now held in a cash ISA. According to investment firm Janus Henderson, in the first six-months of 2025, £42.5bn was invested in tax free cash ISAs. The main driver has been the fear that Chancellor Rachel Reeves will cut the cash ISA limit in her November Budget with suggestions of this being halved from £20,000 to £10,000. Given equities carry greater risk than holding cash, it will be interesting to see how savers react to ‘Rachel from accounts’ latest great idea to boost the UK economy.

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