From Fortune, October 7, 2025:
A top Wall Street analyst has sounded an alarm over the U.S. equity bull market, warning that its remarkable run is built on a precariously narrow foundation: a surge in spending on, and optimistic assumptions about, infrastructure for artificial intelligence (AI). This spending has fueled a boom in the shares of most of the so-called Magnificent 7 and a few dozen related businesses, which have now come to account for roughly 75% of the S&P 500’s returns since the rally of the last few years began.
The commentary on September 29 by Morgan Stanley Wealth Management’s chief investment officer, Lisa Shalett, frames the current market boom as a “one-note narrative” almost entirely dependent on massive capital expenditures in generative AI, raising questions about its durability as economic and competitive risks start to mount. Shalett’s critique came squarely in the middle of some people in the AI field — and many financial commentators around Wall Street —fretting at market exuberance and beginning to talk openly about a bubble.
In an interview with Fortune, Shalett said she was “very concerned” about this theme in markets, saying her office had broadened from a belief that the market would only bid up seven or 10 stocks to roughly 40. “At the end of the day … this is not going to be pretty” if and when the generative AI capital expenditure story falters, she said.
Shalett said she’s worried about a “Cisco moment” like when the dotcom bubble burst in 2000, referring to the company that was briefly the most valuable company in the world before an 80% stock plunge. When asked how close we are to such a moment, Shalett said probably not in the next nine months, but very possibly in the next 24. When you look at the actual spending and the amount of capital coming into the space, “we’re a lot closer to the seventh inning than the first or second inning,” she said.
‘Starting to do what all ultimate bad actors do’
Shalett’s comments centered on several recent multibillion-dollar deals to scale up data-center infrastructure. As notable substacker and former Atlantic writer Derek Thompson recently noted in a post titled “This is how the AI bubble will pop,” so much money is being spent to support AI’s energy-consumption needs that it’s the equivalent of a new Apollo space mission every 10 months. (Tech companies are spending roughly $400 billion this year alone on data-center infrastructure, while the Apollo program allocated about $300 billion in today’s dollars to get to the moon from the 1960s to the ’70s.)
What’s more than a little concerning to Shalett is that one company alone, Nvidia—the most valuable company in the history of the world, with an over $4.5 trillion market cap—is at the center of a significant number of these deals. In September alone, Nvidia invested $100 billion in OpenAI in a massive deal, just days after pledging $5 billion to Intel (the Intel agreement was tied to chips, not data-center infrastructure, per se).
Fortune‘s Jeremy Kahn reported in late September on significant concerns about “circular” financing, or Nvidia’s cash essentially being recycled throughout the AI industry. Shalett sees this as a major concern and a major sign that the business cycle is headed toward some kind of endgame. “The guy at the epicenter, Nvidia, is basically starting to do what all ultimate bad actors do in the final inning, which is extending financing, they’re buying their investors.”
Shalett expanded on her concerns by saying that companies around Nvidia “are starting to become interwoven.” She noted that OpenAI is partially owned by Microsoft, but now Nvidia has also made an investment in the startup, while Oracle and AMD each have their own purchasing agreements with OpenAI. But OpenAI also has a data-center deal with tech giant Oracle, with the “bad news,” Shalett notes, that this deal is “totally debt-financed.” OpenAI also struck a deal in October with chip-maker AMD that allows OpenAI to buy up to 10% of AMD. “Essentially, Nvidia’s main competitor is going to be partially owned by OpenAI, which is partially owned by Nvidia. So, Nvidia can ‘own’ a piece of its largest competitor. It is totally circular and increases systemic risk.”
When reached for comment, a spokesperson for Nvidia said, “We do not require any of the companies we invest in to use Nvidia technology.”
Nvidia CEO Jensen Huang discussed the OpenAI investment in an appearance on the Bg2 podcast with Brad Gerstner and Clark Tang on September 25, calling it an “opportunity to invest” and part of a partnership geared toward helping OpenAI build their own AI infrastructure. When asked about the allegation of circular financing in general and the Cisco precedent in particular, Huang talked about how OpenAI will fund the deal, arguing that it will have to be funded by OpenAI’s future revenues, or “offtake,” which he pointed out are “growing exponentially,” and by its future capital, whether it’s raised by a sale of equity or debt. That will depend on investors’ confidence in OpenAI, he said, and beyond that, it’s “their company, it’s not my business. And of course, we have to stay very close to them to make sure that we build in support of their continued growth.”....
....MUCH MORE
And our priors? From a bit before the Fortune piece was published, July 9, 2025.
"The 'new normal' of growth stock dominance"
What our five years of blather regarding advantage flywheels is all about.*
*****
This is a corollary of the basic framework for understanding businesses and investing that we've been pitching for the last six or seven years.
If interested see:
Why Do the Biggest Companies Keep Getting Bigger? It’s How They Spend on Tech"
...Much more important than the direct monetization of big data is the strategic advantage it can bestow over time.
In a winner-take-all economy, as in a horse race, small differences in superiority are rewarded all out of proportion to the actual advantage. A top thoroughbred may only be a couple fifths of a second faster than the field but those two lengths over the course of a season can mean triple the earnings for #1 vs. #2.
In commerce the results can be even more dramatic because rather than the 60%/20%/10% purse structure of the racetrack the winning vendor will often get 100% of a customer's business.....
In Nvidia's World, If You (and your company) Don't Have Money You Will Not Be Able To Compete (NVDA)Competitive Advantage and Feedback Loops
How to Think About Companies: 'Advantage Flywheels'
A very handy conceptual framework first posted after the start of the U.S. lockdowns, April 2020. Schools were closed so it seemed natural to link to a superb mini-MBA module.
Eat your heat out HBR....****....As artificial intelligence comes more and more to the fore, the advantages accruing to those companies that can afford to make use of their data and custom train the machines will act as advantage flywheels that shift the distribution of profits from the normal Pareto: 80% of the loot goes to the top 20% of businesses to perhaps as much as 95% of all the profits going to the top 5% of businesses.I didn't really mean the "eat your heart out HBR" line.
Here's the Harvard Business Review on this very point:
HBR—From Pareto To Hyper-Pareto: "AI Is Going to Change the 80/20 Rule"Flywheel Effect: Why Positive Feedback Loops are a Meta-Competitive Advantage
"America's Biggest Firms' Moat Is Becoming Impregnable" (TSLA; NVDA; GOOG)
The announcement at the end of August that Tesla was going live with their supercomputer — Elon Got Himself A Supercomputer: "Tesla's $300 Million AI Cluster Is Going Live Today" (TSLA)—reminded me of this piece at ZeroHedge, last month. We'll be back with more on Morgan Stanley's Tesla note later today but for now the TL;dr is "To the victor go the spoils" or "The rich get richer" or "Those who can afford a supercomputer will get closer to discovering the profitability (if any) of AI than those who can't afford a supercomputer."
The advantage flywheels keep spinning and reinforcing each other to the point that the Pareto distribution of profits - 20% of companies reap 80% of the profits - is becoming Super-Pareto where 5% of the companies reap 95% of the profits and is approaching Hyper-Pareto at maybe 2% of companies reaping 98% of profits.
It all comes down to having the resources to keep up.
I watched Mr. Huang give the keynote and it's all a bit much to digest before firing out comments that would make any sense at all so here are some of today's headlines to give a taste of what the intro paragraph is based on.
These are Nvidia's press releases via GlobeNewswire....
This.
This is such an important concept to grasp. It's the advantage flywheels, the rich get richer, winner-take-all reality of business in 2024....
The Hyper-Pareto Distribution Of Profits Is Happening Right Now (plus an anniversary)
It's not some cutesy management* fad or pop insight like "Business secrets of Genghis Khan."To the rich go the profits and internalizing that fact makes the rest of this portfolio construction/fund management/investing stuff easier to conceptualize and execute.
And AI is accelerating the already extant dynamic....
*Although people had been observing and discussing "rich get richer" and "winner-take-all" dynamics for over a century, one of our favorite pointers toward the current situation did come out of a business school. We've been hammering on this for so long that I start to bore myself. Here's a recapitulation from last year, linking to an article that was published seven years ago today:
HBR—From Pareto To Hyper-Pareto: "AI Is Going to Change the 80/20 Rule"
A prescient article from the Harvard Business Review, February 28, 2017:....
*****
Just to reiterate, every incremental advantage that a company can afford does not affect income production in isolation. They accrete in sometimes unforeseeable combinations:
AI: Tesla Installing Second Dojo Supercomputer In New York Gigafactory (TSLA; NVDA)
AI: "Inside Tesla’s Innovative And Homegrown 'Dojo' AI Supercomputer" (TSLA)
It really is a big deal that a company can afford to spend over a billion dollars to build their own supercomputer and it really is a big deal that the same company has all the training data from the billions of miles of real-world driving and it really is a great example of the concept of advantage flywheels and hyper-pareto distribution of rewards, i.e. the rich get richer.
Whether it is going to open-up the $10 trillion addressable market and add the $500 billion of market cap that Morgan Stanley foresees is still an open question....
....As artificial intelligence comes more and more to the fore, the advantages accruing to those companies that can afford to make use of their data and custom train the machines will act as advantage flywheels that shift the distribution of profits from the normal Pareto: 80% of the loot goes to the top 20% of businesses to perhaps as much as 95% of all the profits going to the top 5% of businesses.
I didn't really mean the "eat your heart out HBR" line.Here's the Harvard Business Review on this very point:
HBR—From Pareto To Hyper-Pareto: "AI Is Going to Change the 80/20 Rule"
And many more. If interested use the 'search blog' box, upper left.
