Why the AI Bubble Hasn’t Popped — ft. Josh Brown

0:00Support for the show comes from Fundrise. For the past seven years, there's been a room in finance. most people couldn't enter, a room where you could have invested in some of the biggest names in tech companies like Airbnb and Uber before their multi-billion dollar IPOs. I'm talking about venture capital. Fundrise recently took a sledgehammer to those closed doors by launching a venture capital product that's available to anyone. Their mission is to give everyone the chance to invest in the best tech and AI companies before they go public. You can visit fundrise.com slash profg to check out Fundrise's venture portfolio and get in early today.

0:35All investments involve risk, including a potential loss of principal. Past performance is not indicative of future results. This is a paid advertisement. Today's number, 54. That is the percentage of men who have some form of facial hair up from 42 % 10 years ago. According to surveys, most men don't actually like their beard at first, but then it grows on them. Okay. Oh, I was supposed to. Oh, my God. No, if you don't find it funny, then that's just what we do. I did, but it was a delayed reaction. I did find it funny. Listen to me. Markets are bigger than us. What you have here is a structural change in the world distribution.

1:21Cash is trash. Stocks look pretty attractive. Something's going to break. Forget about it. Welcome to Prof G Markets. Scott is still on vacation, but we are back in action. and we are kicking off the year with the one and only Josh Brown, co-founder and CEO of Ritholtz. Josh, welcome back to the show. It's great to see you. Great to see you. I apologize for dressing like the great and powerful Oz. I didn't pick up on it until I saw myself on a video screen. That's the energy I came into the year with. I love it. You're looking good. How was your holiday? How was your new year? So sick. So great.

2:02You know what? I've been in Florida for two weeks. I have a tan. You look good. The weather sucks here, predictably, but it's not even bothering me. I just had an amazing couple of weeks for the holidays, and I feel good. Ready for 26. Ready to rumble. Ready for 2026. Okay. Well, let's get right into it. A lot of questions I want to ask you. We haven't had you on since the summer, and a lot has happened since then. We had the government shutdown. We had rate cuts. We had this AI bubble story, which kind of got huge. A lot of people were talking about it. Just as you look back on 2025 and what's happened since we last spoke, just a pretty general question.

2:51What have been your biggest takeaways? I think the key thing was not getting too negative in November when Oracle was blowing up. And it seemed like this was going to be like this, this comeuppance for all the data center spend. And all of a sudden, like the floor was about to fall out from under all of us. And like if you fell prey to that narrative, which obviously a lot of people – so there's two categories. There are people that fell prey to it because they are just nervous by nature or they tend to fall for all of those types of like bouts of negativity. But then there's another camp of people that really did want it to fall apart.

3:33They wanted it to crash. And, you know, some of that is like political. Some of that is people who missed out on the AI trade for the last three years. But like whatever, you just have this huge chorus of people warning you like this is the next year 2000 and it's dot com point, you know, 2.0. But I think the key to this year was not falling prey to it. And if you were able to stay the course, like we're talking right now, the Dow is going to have its first close, I think, today above 49 ,000. and the Nasdaq looks incredible, you know, through the end of last year and now into the first week of this year.

4:13And I think it's really, it's tough sometimes when everyone is screaming bubble, bubble, bubble. It's really tough to like, you know, stay the course and stick to your guns. But that really was the key to the fourth quarter. Which part of those bubble fears do you take issue with? Because, you know, we were talking about it a lot on this podcast and there were several moments which I think were substantial and they were legitimately concerning. I think the biggest one was probably what we saw on Brad Gersner's podcast, where they asked Sam Altman about the revenue and the amount that they're going to spend.

4:51The fact they want to spend one and a half trillion dollars, they've got$13 billion in revenue. And then we saw kind of the worst response we've ever seen from a CEO, the CEO of a company on which a lot of the momentum in the market really depends on. So, you know, we weren't saying it was doomsday on this podcast. We were trying to be rational about it. But it was something that we were worried about or that we thought was at least significant. I guess from your view, which part of the bubble story was wrong or misguided? Well, no, we still may end up having a bubble. But I look at price. I look at valuation.

5:32I look at all the things that classically you're supposed to look at. And the stock market just was not going along with the story that this is all coming to an end. If you looked at the way semiconductor stocks were acting, they just they were not giving into that narrative. And if you like I so I'm one of the people that comes on the show with you. And, you know, my big thing that I try to get across when I can, what I'm trying to convey is that prices are more important than opinions. And prices represent the sum total of people who actually manage money and are voting with their money. So, again, I think there's a lot of wish casting.

6:15A lot of people want to see open AI in the private market somehow like burst into flames. a lot of people want to see Larry Ellison and Oracle have a comeuppance. That's wish casting. It's people saying they think that's going to happen, but what they're really saying is, I want this to happen. And if you are looking away from Oracle's CDS prices, which I don't think are particularly important, but if you are looking at actual share prices for NVIDIA and Broadcom and Corning, which makes the fiber optics for all the data centers. And you were looking at, you know, you definitely saw stocks come down, but you did not see stocks plunging, stocks crashing.

6:59That's not how the real money was betting. And here we are just a couple of weeks out of that. And most of those stocks have recovered. The SMH looks amazing. I think 86 % of the names in the SMH semiconductor ETF are above their 50-day moving average. That didn't take long. So I think it's really important when you hear people pounding on, you know, with a wooden spoon on a pan talking about bubble, ask yourself, why are they doing it? Are they in the content business? Okay. They're doing it for attention. They're doing it for clicks. I get that. There's nothing wrong with that. Everyone's got to make a living.

7:40Are they money managers who are overweight, small cap value, underweight tech? Okay. I get that too. They're wish casting. They want these stocks to blow up so they can call their clients and say, you see, I was right. I'm not a schmuck. I told you so. So there's a lot of that going on. Obviously, people on financial television, it's high ratings when stocks like Oracle blow up. And then the next one and the next, they want that domino effect because this is when people are paying the maximum amount of attention to financial media. So there are a lot of people who have a vested interest in seeing this thing go badly, and maybe it will.

8:22But I think it becomes really important to say, all right, who's talking about this that's actually invested? Who's talking about this that literally has money on the line, reputation on the line, that has skin in the game? I want to listen to those people. Not that they can't be wrong, but my God, I need a counterbalance to all the chicken littles and all the people saying the end is nigh. Because without that counterbalance, you're just listening to people who are wish casting. What I would say in pushback is, you know, you're describing a dynamic where there are certain people who have a vested interest in things going down.

9:01But on the flip side, there's also people who have a vested interest in things going up. Yes. And everyone has vested interests. Everyone has things that they want or internal biases. They want things to go right. Maybe they want things to go wrong. And I think to your point, it is so important to figure out how to kind of weed through that. My point is, when in doubt, follow price. When in doubt, trust what the markets are saying about the price of a stock. Pay less attention to what people say and more attention to what they do. Fair enough. I think that's definitely true. on open AI as an example.

9:40So I feel like we need to kind of bucket these companies into two buckets, basically. Totally true. Where you do have many of these AI-related stocks, which I think are growing pretty healthily and they're managing their balance sheets well and everything looks pretty good. And then I think there are other companies like open AI, which I honestly, I mean, maybe I'm one of those wooden spoon banging against the drum, But I don't look at what OpenAI is doing from a financial management perspective. And I don't think it inspires much confidence in me personally. And the trouble is, I can't follow the price because it's private.

10:20So I actually don't know what the price of OpenAI is. But if I had to guess, based on what we're seeing in the public markets, I would probably look at Oracle as a proxy for what's going on with OpenAI. And it's not looking very good. So in that sense, OpenAI doesn't seem to be the best reflection of what is happening in AI right now. I have so much other stuff I want to ask you, but I am just interested in this topic. Would you agree that we need to divide it up? I think you're exactly right. It's a very unique situation where one of the most important chess pieces is not on the board. It's a highly, highly unique situation.

11:03I've likened it in other venues I've explained it as Kaiser Soze in The Usual Suspects Sam Elton limping off it's the main character in the movie, it's the thing that animates the actions of everyone else in the movie and he doesn't show up until the last one minute of the film, in old Hollywood they used to call it the MacGuffin so the Maltese Falcon what is the Maltese Falcon It's a stupid statue, but it's the MacGuffin. It's the thing that sets everything else in the movie in motion. Open AI share price is not tradable. Now, of course, there are people who are invested in it, but even if they on a Monday, they're bullish on a Tuesday, they're bearish.

11:47They don't have the liquidity to change their mind and act on that that price in the way that we have in the public market, to which I would respond to you. I'd say you're exactly right. Thank God for public markets, number one, because, yes, there is a lot of concern about open AI. And we saw it viscerally in the prices of the companies that were deemed to be, quote, open AI dependent. Companies that open AI is spending the most money on their services. And Oracle sort of became like an avatar for that. But let me ask you a question. Anthropic, one of the biggest players in AI, also private. spends about$5 billion annually that we know of on the AWS cloud to support its business.

12:35Anthropic is actually ahead of OpenAI in enterprise. They're selling to thousands of the largest organizations and corporations around the world. We don't have a share price for that one either. You think Anthropic is in as big of a drawdown from its high as the public share price of Oracle is? Probably not. Amazon actually consolidates some of the profit from Anthropica's doing as a very large shareholder of the company. We think that that business is gangbusters. So, yes, you have to bucket these things, but then you also have to realize narratives in AI are shifting overnight. Seven months ago, the talk around Alphabet is that they're finished.

13:22They're done. they're going to get murdered by OpenAI and other LLMs. People are going to start their searches on perplexity and Claude and ChatGPT and completely bypass the Google experience. And then Google goes up 65 % on the year, becomes the best performing of the Mag7. And all of a sudden, it's Google's world and the rest of us live in it. That shift didn't take three years. It took like three months. So the narratives and the banging on pots and pans has to give way to the primacy of price. What are people actually betting on with real money versus who is wish casting and just hoping the guy they don't like goes down for the count, right?

14:09Oh, I don't trust Sam or I hate Elon or it's so important to focus on price more than ever, not to try to sit here and parse 50 different people's opinions. That game is almost impossible. The real game is, okay, fine, but what are the buyers doing? What are the sellers doing? We'll be right back after the break. And if you're enjoying the show so far, be sure to give Prof G Markets a follow wherever you get your podcasts.

14:44Support for the show comes from Fundrise. For the past 70 years, there's been a room in finance that most people couldn't enter, a room where you could have invested in some of the biggest names in tech, companies including Airbnb and Uber, before their multi-billion dollar IPOs. I'm talking about venture capital. But unless you had millions of dollars and the right connections, the door to the venture capital room was closed. You were stuck waiting in line with everyone else. But recently, Fundrise took a sledgehammer to that door when they launched their venture capital product and made it available to anyone with a minimum investment of just$10.

15:16Fundrise says their mission is to give everyone the chance to invest in the best tech and AI companies before they go public. Visit fundrise.com slash prop g to check out Fundrise's venture portfolio and start investing in minutes. All investments involve risk, including the potential loss of principal. Past performance is not indicative of future results. This is a paid advertisement.

15:44Support for this show comes from LinkedIn. If you've ever hired for your small business, you know how important it is to find the right person. That's why LinkedIn Jobs is stepping things up with their new AI assistant. So you can feel confident you're finding top talent that you can't find anywhere else. And those great candidates you're looking for are already on LinkedIn. In fact, according to their data, employees hired through LinkedIn are 30 % more likely to stick around for at least a year compared to those hired through the leading competitor. That's a big deal when every hire counts. With LinkedIn Jobs' AI assistant, you can skip confusing steps and recruiting jargon.

16:15It filters through applicants based on criteria you've set for your role and surfaces only the best matches so you're not stuck sorting through a mountain of resumes. LinkedIn Jobs AI Assistant can even suggest 25 great fit candidates daily so you can invite them to apply and keep things moving. Hire right the first time. Post your job for free at linkedin.com slash prof. Then promote it to use LinkedIn Jobs' new AI Assistant, making it easier and faster to find top candidates. That's linkedin.com slash prof to post your job for free. Terms and conditions apply.

16:54We're back with Prof G Markets. Based on everything you've told us here and what you've seen in 2025, let's look ahead to 2026. We've been having a lot of different commentators on telling us their predictions for the year. We've gotten kind of a range of opinions. What are your predictions for markets this year? Are you bullish on 2026? Are you bearish and why? So we're money managers, not sell side analysts and not chief strategists. So we don't have price targets. We don't have our own internal earnings expectation. What we do for clients is we rationalize the risks they're taking with data.

17:37and we try to give them the historical context that we think is more important than the prediction of the month or of the day these days because we're in the January where everyone's making their year-end predictions. But this is what I would share with you. The only questions that matter for this year, number one, will the fundamentals continue to justify an above average price earnings multiple? That's it. That's the question. You either answer that yes, no, maybe, or let's say yes, no, I don't know. So of course, like obviously I don't know, but I think the answer is yes. Why do I think the answer is yes?

18:16Well, the first earnings season we'll have is Q4. We'll start getting these reports in February. And here are the consensus estimates. You tell me what you think when I'm done. Wall Street thinks the S &P will deliver an 8.6 % earnings growth quarter versus Q4 of 2024, okay? They think that technology sector, which is obviously the most important sector for earnings growth and also for market capitalization, will do 25.8 % earnings growth. That's an eye-popping number. If they do 24 % or 27 % or anywhere in that vicinity, wouldn't you agree that that would support a 21 multiple on the overall S &P, given how important those companies are to market cap.

19:07That's what I would say. You're not getting that across the whole S &P. You're getting that in tech. And a lot of that's coming from semiconductors. Okay, fine. But the number is the number. We don't put asterisks on any other year for the S &P 500. Why would we all of a sudden put an asterisk now? Here are the full year 2026 consensus estimates for sectors. The big sectors that matter. Wall Street thinks industrials will do 13.1 % earnings growth. They think technology would do 29.7%. 30 % not revenue, earnings growth for 26. Again, if they even get close. But here's what's really fascinating.

19:48Financials, 10.4 % for 2026. Consumer discretionary, huge sector. Amazon's in that sector. Tesla, for some reason, is in that sector. 11.7 % communication services. That's Alphabet, Meta, Netflix, et cetera. 7.2%. So like if healthcare eight and a half, utilities 8.7, that's become a de facto AI trade. So the consensus thinks the S &P 500 will grow earnings once again for all of calendar 2026 by 14.6%. So with a typical beat rate, it'll probably be more like 15, 16%. If you think the market delivers that, 21 times earnings is justifiable. And so it doesn't mean we'll get another, you know, 18, 20 % return on the S &P, but at the very least, we should have a lot of winners in the market.

20:4516 stocks of the S &P doubled last year. These aren't obscure, bizarre stocks no one's ever heard of. Some very big stocks doubled last year. all sorts of stocks went up 30 40 50 60 percent and i want you to remember the stock market wasn't cheap a year ago at this time so the earnings growth has to deliver so the the real question that we need to answer is will it yes i think it will and there's a chance that that's wrong you could have some sort of an exogenous shock that changes everything so you have to just be like okay with that that's the risk that we're all taking because just for fun go read the january 2020 year ahead outlooks from wall street how many of them were talking about coronavirus zero hundreds of outlooks zero and that obviously changed everything stock market ended up going up by the way um but i'm just making the point like the thing that could alter the course of 15 earnings growth this year is not really the thing that any of us could put our finger on.

21:54Now, a lot of people would say, oh, it's going to be the AI data centers. They're going to slow down. There's going to be another Oracle, blah, blah, blah. Okay, possible. But right now, that's just not, I wouldn't say that's sort of like what should be anyone's base case, that all of a sudden, all this money that these companies have spent, they're going to say, you know what, forget it. It's just unlikely to me. So that's where I am on 26. I think that makes a lot of sense. And I appreciate, I think it's a really good framework. Let's just focus on the fundamentals. Are the fundamentals going to grow in 2026?

22:31And a lot of indicators would say, yes, they will. Beyond just the numbers itself that Wall Street is projecting, but the fact that we do have interest rates coming down, and the fact that we're going to see more deficit spending. Having said that, on the AI front, I think one of the questions that I'm thinking about and that a lot of people are thinking about is we've seen all of this unbelievable spending. And as you say it, it is mostly coming from the semiconductor industry. That's sort of where the action is happening. And that's what's kind of driving growth at this point. But I think the question then becomes, will we see the ROI on those chip and data center investments?

23:16Like, is it the case that all of the money that Meta is spending on the data centers and that Alphabet spending on the data centers, all the money that they're spending on these chips, are we going to see that reflected? Are they going to get a real return on their investment in the, what I would say, the real economy, which is the consumer economy. And for that, we kind of have to look at companies like Anthropic. We have to look at companies like OpenAI. And we have to figure out how much are people actually willing to spend for this stuff. Palantir is your tell. Okay. Amazon is your tell. Alphabet.

23:55This is where the spending is literally happening. Corporations are not buying GPUs. Amazon and right like Amazon Alphabet Microsoft are buying GPUs meta and why are they buying them because their customers want to be able to do more with their data and that's how that works so you watch the data centers I think everyone is so that's not like a big revelation you watch the Palantirs the Accentures you listen to their commentary Those are the companies that are actually assisting large enterprises with like, OK, great, AI, AI, AI. What do I actually do with it? How like how does it help me beat earnings, you know, next quarter?

24:47Well, here's a project that you could work on right now. So like that's that's where the rubber meets the road is in that part of the market. Look, I think you look at the performance in sectors that have nothing to do with AI. over the last year. And you've seen like different sectors waking up. Biotech had an unbelievable comeback in 2025. What is materially changed in biotech? Nothing other than the use of AI is probably a huge efficiency driver in phase one, two and three clinical trials. It probably speeds up a lot of the things that have slowed those companies down in the drug discovery realm.

25:30That's the way Wall Street is starting to price in the AI opportunity in healthcare. Look at the financials. Same thing. Fraud detection, cybersecurity, like AI becomes a force multiplier in things that they're already spending money on, if they could spend money more efficiently. And the last thing, and I know we're going to get to this, but at CES, NVIDIA was able to show that they have done in one year what took Tesla eight years to automate an automobile so that it could drive through the city of San Francisco without a human touching any of the steering wheel, gear shift, brake, acceleration.

26:16Again, that's eight years of Tesla experimenting on the road. NVIDIA has an off-the-shelf solution for every OEM in the world to turn their automobiles with a few sensors and a software package and a chip package into an autonomous car. You know who NVIDIA works with? Volvo, Mercedes-Benz, GM, Toyota, Jaguar, Land Rover, all of them are going to have access to minimum level two autonomous driving via NVIDIA. They'll be able to catch up to Tesla like within a year, 18 months. Now you think about these, you say, what's the ROI? Are you fucking kidding me? The ROI for these types of projects, and we're not even getting into robots, which is probably a late 2020s story.

27:09Like robots as like an ROI driver is probably 27, 28, 29. But like that is what the street is pricing in when it says it's willing to pay 22 times for the top 500 companies in the United States. That's the mentality right now. It's not what's the ROI. It's oh my God, I can't even imagine how big the ROI could be. It's all moving so fast. My dreams can't even keep up with the things that they're announcing. It's a very exciting time to be an investor. Not to lose your head. It'd be different. If I said to you, the S &P's 45 times earnings, like it's the year 2000, all right, it's a different conversation, but that's not what's going on right now.

27:54I wish it were. It'd be more fun to talk about. It'd be a slam dunk bubble. We could all be short and get rich. It's just not that easy. Yeah, I think the other piece of it is the timing of all of this. It's sort of like, what is our time frame for when we're going to see that ROI and what are Wall Street's expectations for when that is all going to come through? And I think that kind of defines whether we see an implosion, whether we see a correction or some sort of crash or we don't. I'm with you. The ROI is going to show up at some point in some way, and it'll be in a very big way. Would you right now, here's a thought exercise.