Warning Signs Flashing! Wall Street's "Big Bear" Sounds the Alarm Again: AI Bubble Will Eventually Burst Dramatically

John Hussman is sounding the alarm about another dangerous signal in the market. This renowned bubble watcher and president of Hussman Investment Trust has long warned that the stock market bull run could ultimately end in a spectacular fashion. Now, he’s highlighting another sign he believes may indicate how the AI bubble could burst.

In a report released on Sunday (April 26), Hussman specifically mentioned the emergence of a pattern worth close attention—a simultaneous surge in corporate profits alongside both public and private debt.

Corporate profit surge, AI expectations as a core driver

In recent years, U.S. corporate profits have grown significantly, mainly driven by market optimism for artificial intelligence and a series of major deals in the tech industry.

According to data from the U.S. Department of Commerce, after inventory valuation and capital consumption adjustments, after-tax corporate profits are on track to grow by over 10% year-over-year by the end of 2025.

However, Hussman believes the market’s expectations for AI-driven profit growth are “excessively optimistic.” He even compares the current market situation to a type of investment scam. #AI Boom: From Chips to Capital Race#

He stated: “A hallmark of a Ponzi scheme is persuading investors to pay for future cash flows, some portion of which do not actually exist; at the same time, it creates the illusion that these cash flows will generate attractive returns relative to the price paid.”

Hussman pointed out that current stock market valuations are at record levels, yet investors continue to bet on AI generating substantial returns in the future.

Debt ballooning in tandem, hidden risks behind corporate profits

Meanwhile, U.S. debt levels are rising rapidly. According to data from the U.S. Treasury, total federal debt has recently ballooned to over $38 trillion.

But the problem does not only exist in the government sector. Households and corporations are also continuously adding to their debt.

Hussman explained that if debt from households and foreign trade partners is also taken into account, corporate free cash flow actually shows an “exact mirror image relationship” with deficits. This means the profits in the corporate sector are likely heavily supported by deficits in other parts of the economy.

In other words, while current corporate profits appear strong, they may rely on continuous borrowing by the government, households, and other parts of the economy. Should the fiscal and debt environment change, corporate profit margins may also retreat from their current extreme levels.

Hussman: Technological progress does not necessarily lead to net growth

Hussman was successful in warning about the internet bubble, and for years has cautioned that the market may be in the midst of history’s “third largest speculative bubble.”

He stated that he does not believe technological advancement is guaranteed to bring net economic growth. Instead, the financial impact of new technology is “primarily to widen the income gap.”

Hussman believes that as wealth becomes increasingly concentrated in the hands of a few, the government may in the future have to provide more support to the household sector.

He speculated: "If we allow for the possibility that the U.S. ultimately returns to fiscal stability, then corporate profit margins will also recede from their current extreme levels."

He added: “That’s the magic of the Ponzi scheme—as long as no one questions whether those future cash flows will really arrive, everything seems to run smoothly.”

“The bubble will ultimately collapse in flames”

However, Hussman said his firm is not yet making specific predictions as to when the stock market bubble will burst, since factors that have typically led to valuation declines in the past have “not been sufficient” to trigger a correction this cycle.

Nevertheless, his overall view remains clear.

He said, “My view remains that this bubble will ultimately collapse in flames.”

This year, concerns around AI-related trades have been mounting. Investors have become increasingly focused on overvaluation, and how artificial intelligence may disrupt business models across multiple industries.

Despite the technology sector remaining one of the best-performing sectors in the market, it has begun to show lagging signs compared to sectors like energy and materials since the start of the year.