Is the U.S. Stock Market Built on AI Hype? Chris Wood Warns of Overinvestment Risk in AI

The world is in such desperation to invest in AI. But many wonder and want to know if it’s underinvesting or overinvesting. Perhaps, it’s overinvesting, says Chris Wood (speaking to ET NOW), the Global Head of Equity Strategy at Jefferies. He studies stock markets to predict risks and trends, and he is warning about the risks of lower returns and more. Have you heard of AI stock market recommendations? It is when you use AI to decide where to invest money, and more often than not, it recommends investing in AI. So, is the market caught in a loop? Learn more from Chris Wood.

What Is Chris Wood Saying About the U.S. AI Stock Market?

U.S. Stock Rally Is All About AI, Not Tariffs or the Economy

• The U.S. stock market, especially the S&P 500, is going up a lot. Several assume that it is the case because of tariffs and strong economic performance.
• However, Chris Wood, on the other hand, says it’s because of the AI hype.
• Many companies are racing to invest in AI, specifically AI capex, meaning capital expenditure/investment in AI infrastructure.

The Big Drivers Are Only a Few Companies

• It all started in early 2023 when Microsoft invested in OpenAI, and suddenly, the stock market rally was all powered by a few tech giants.
• More particularly, the five hyperscalers include Microsoft, Google, Amazon, Meta, and Nvidia.
• All five made up 50% of all S&P 500 gains.
• This means that the market isn’t rising broadly, but instead is concentrated in AI stocks. 

The “AI Arms Race” Effect

• Wood calls this move of investors an “AI capex arms race” because all the tech giants are just competing to push billions into AI models.
• Although the companies are planning to spend $350 billion on AI infrastructure this year, the returns are doubtful. It is just going to create a bubble.

Deepseek Shook Things Up

• China released DeepSeek, which is an open-source AI model (meaning a free tool), this year. So, how is the company making money? 
• This is paramount because a significant amount of money is invested in creating the AI, and it is accessible for free, resulting in a waste of resources. And so is it for investors.
• After the announcement of DeepSeek, the stocks fell sharply and picked up after a while. After this bounce back, stocks rallied again. According to Wood, the investors didn’t learn the lesson. 

Retail Investors Are Driving the Market

• Typically, stock markets are driven by institutional investors, such as mutual funds and hedge funds.
• But now, they are moved mainly by retail investors like regular people buying stocks.
• Wood outright warns that it’s a risk if you listen to an AI and invest in AI because it says to do so. This is a feedback loop:

AI says, “Buy AI stocks.”

People buy.

Prices go up.

AI says, “See, it works, now buy more.”

Risk of Overinvestment Bust

• According to Wood, if these AI models become commoditized, meaning affordable, then the big investments by hyperscalers will go to waste.
• Later, it will lead to a burst of the AI bubble, just like the dot-com crash in the U.S. in 1995. 

Valuation Concerns

• According to Wood, the U.S. market right now is at an all-time high in price-to-sales ratio. This means the share price is compared to the company’s revenue.
• And more importantly, he says that the earnings of the companies are artificially inflated via non-GAAP accounting. It is a method that excludes certain costs (of the company) in order to make the profits look better.