Bubbles, Bonds and Baskets

Are Nvidia and AI (the artificial intelligence industry) part of one of the largest financial bubbles of all time?

The numbers suggest they are.

Nvidia comprises 8% of the total market cap of the S&P 500.

No stock in history has had a higher weight in the stock index.

Nvidia also haa a market cap that is higher than the entire stock market of China or the UK.

It is just $1 trillion less than Japan's Nikkei 225 index which is the second largest stock market in the world after the U.S. 

In fact, Nvidia's recent valuation ($4.3 trillion) is higher than the entire GDP of India and nearly twice that of Canada.

Only three countries in the world have a larger total economy than the current value of Nvidia.

Largest GDP Countries-2025
Source: https://www.cerityglobal.com/blogs/top-15-countries-by-gdp-in-2025/

Will Nvidia's future profits eventually justify its high stock price?

Anything is possible but that seems extremely unlikely to me based on past history.

I am reminded of the story of the stock price of RCA (Radio Corporation of America) in the 1920's and 1930's.

RCA was the high-flying stock of the Roaring 1920's. It was the leading company in the emerging field of "wireless" communication for the masses era.  The stock appreciated almost 10-fold between 1924 and 1929.  However, an investor who purchased RCA at its 1929 high had to wait 57 years to recoup their investment. That time period also encompassed RCA getting into the television market in the 1940's and 1950's.

57 years is a very long time to wait to see your stock to increase in value.

Investors got a little ahead of reality.

A more familiar name of recent years is Cisco Systems. It has been a great company for a long time.

However, 26 years after its high in the dot.com madness, it still has not exceeded its value from a quarter century ago.

This is despite Cisco increasing revenues by almost five-fold and net income rising from $2 billion in 1999 to over $10 billion in 2025.

It had a market cap of almost $400 billion in early 2000. Today, over 25 years later, Cisco is valued at less than 3/4 of that ($270 billion) total.

Perhaps Nvidia can justify that stock price but history suggests it is unlikely.

All of this would not be of concern to the masses but for the fact that Nvidia has such a large weighting in any 401(k) or other stock portfolio that is invested in the S&P 500---which is almost everyone's.

If we are in a Nvidia and AI bubble your nest egg is most likely at risk even if you never gave investing in Nvidia or AI a thought.

Looking beyond Nvidia, which is just one of 4,200 NYSE and NASDAQ publicly-traded stocks in the United States, there are now 4,300 ETF's (exchange-traded funds).

Credit: https://x.com/SamRo/status/1959971872986013821

In addition, there are over 7,000 mutual funds in the United States.

There have never been more choices in how to invest your money.

And many of those fund managers have Nvidia and other AI names among their fund investments which have been fueling recent gains.

How are those fund managers feeling right now about U.S. market prospects?

They are not real optimistic.

They have a lot more confidence in finding value in emerging market stocks than in U.S. equities.

As stocks become overvalued and carry greater risk to investors the typical investment move is to reallocate assets from stocks to bonds.

Yields on 30 year U.S. treasuries are close to 5% having been as low as 1.32% in 2021.

Source: https://www.cnbc.com/quotes/US30Y

If interest rates decline this could prove to be a wise move as you will not only lock in the 5% income yield but the bonds will also appreciate as rates decline.

However, if rates continue to increase, losses on the bonds will follow.

For example, a holder of 20 year U.S. treasuries is down 38% since 2020 as interest rates rose.

Credit: https://x.com/_Investinq/status/1960346243256733977

Interest rates on long term soverign debt have not just risen in the United States.

Keep in mind that a country's central bank may be able to influence and control short term rates but has little influence on longer term rates which are largely controlled by market forces..

The yield on a 30-year bond in Japan just went over 3.2%.

It has never been higher.

There has never been more risk that something is going to break in Japan than in the current interest rate environment that exists there.

The yield on UK's 30 year bonds have just surpassed 5.6%.

This is the highest interest rate since 1998 in that country.

What is the market telling us with these increases in yields of longer term government securities?

Investors in these bonds are not comfortable with the increasing levels of debt and the accompanying risk and are demanding higher premiums to take the paper.

What does an investor do in times like these?

It has long been said that it is not wise to put all of one's eggs in a single basket.

This is why diversification is a fundamental investment principle.

This has always been the best advice if you do not have the time or inclination to keep a close eye on your investments.

However, what if you have spread your eggs into several baskets and there is still a risk of breakage?

Both Andrew Carnegie and Warren Buffett had excellent advice on what to do if you had all your eggs in one basket.

You better keep a very, very close eye on that basket.

I think the same applies today whether you are invested in Nvidia, stocks, bonds, bitcoin or anything else.

This is especially true as we enter the months of September and October.

These two months have seen some of the largest major market meltdowns in the past.

The Crash of 1929    October, 1929

Black Monday          October, 1987

Post 9/11 Market Decline    September, 2001

Collapse of Lehman Brothers and Global Financial Crisis    September-October, 2008 

Keep in mind that the past is not prologue and this blog post is not intended as financial or investment advice but merely to provide some factual context to the current investment environment. 

However, it is a reminder that it is always a good idea to keep a close eye on whatever baskets you have your money in..

That might be truer now than ever.