Key Takeaways
- Ray Dalio warned that AI is a bubble close to bursting, pointing to heavy AI borrowing and rising interest rates.
- Fidelity’s Jurrien Timmer says earnings are growing so fast that valuations are falling, and he puts S&P tech at 21x earnings against 70x in 2000.
- NVIDIA trades at 19.1x forward earnings, near its 3-year low and well below its 30.4x average, while analysts expect its EPS to nearly double this fiscal year.
- The real risk is the chip earnings cycle, and third-quarter reports are the next test, with S&P 500 earnings growth now expected at 30.6%.
Bubble warnings on the AI trade are piling up, even as NVIDIA (NVDA) trades near its cheapest forward P/E of the last three years.
Billionaire Ray Dalio, founder of Bridgewater Associates, called AI a “classic bubble” on Oct. 7 at the Forbes Global CEO Conference in Singapore. He pointed to the debt being taken on to fund AI and to rising interest rates. His timing? “I think we’re close to that.”
Jurrien Timmer, Fidelity’s director of global macro, doesn’t see it that way. Here’s what he said on the latest episode of The Compound and Friends:
“Earnings are exploding to such a degree that valuations are actually falling.”
Co-host Josh Brown summed it up: “It’s hard to have a bubble when you’re paying less for earnings.”
That’s about as direct an answer to Dalio as you’ll find.
The earnings are doing the work
Timmer’s numbers are hard to ignore. He said semiconductor earnings are up 178% from a year ago, and that tech is nowhere near its dot-com pricing: “S&P Tech traded at a 70 PE in 2000 instead of 21 PE today.”
NVIDIA shows how a stock can rise while its multiple falls. Its normalized EPS rose from $2.99 in the year ended January 2025 to $4.77 in the year ended January 2026. Analysts expect $9.31 for the year ending January 2027, then $15.91 and $21.34 in the two years after that…
If NVIDIA comes close to those estimates, its earnings per share will have grown roughly sevenfold in four years.
With earnings climbing that fast, it’s no surprise the multiple has headed the opposite direction. NVIDIA now trades at 19.1x forward earnings, well under its 3-year average of 30.4x and a long way from the 46.7x peak it hit in June 2024…
The chart’s low, 17.5x, came just last month. Timmer said he’s “almost certain Apple’s multiple is wrong, and so is NVIDIA’s, based on their growth rate.” At 19x for earnings expected to nearly double, I can see why.
Chip earnings run in cycles
The bears have an answer to all this, and one of the hosts put it to Timmer directly: “It’s an earnings bubble.” Their argument is that the data center buildout has pulled chip demand forward. When it fades, earnings and multiples fall together.
Timmer granted the point: “I think there’s some truth to that.” He added that “178% is not sustainable.” He also said the semiconductor index “has a very clear 40-month earnings cycle,” and that chips are right about where that cycle would normally start to turn down.
Micron Technology (MU) shows what that can look like. It trades at just 5.9x forward earnings, about half its 3-year average of 10.6x…
The wild swings on the left of that chart, from below zero to over 80x within a week in December 2023, came when analysts expected Micron to earn very little over the next year. Chip stocks tend to look most expensive at the bottom of the cycle and cheapest near the top. Micron’s 5.9x suggests the market already expects some of that.
The test starts with this earnings season
Still, Timmer said he’s “not worried about the earnings story so much,” because the companies supplying the AI buildout “cannot keep up with demand.” What does worry him is “too much demand for capital, unknown ROIs.” That’s much closer to Dalio’s concern about debt than to a call that the stocks are overpriced.
I think Timmer has the better of this argument. A bubble needs prices running ahead of earnings. In the AI trade’s biggest name, earnings are running ahead of the price, and the multiple near a 3-year low shows it.
This earnings season is the first check. Charles Schwab’s Liz Ann Sonders noted that the third-quarter S&P 500 earnings growth estimate now sits at 30.6%, according to LSEG, up from 15% at the start of the year.
That’s a high bar. Of course, if chip earnings start to roll over the way Timmer’s 40-month cycle suggests, today’s low multiples won’t look low for long.
So what is NVIDIA stock actually worth?
TIKR lets you forecast the future price of any stock in less than a minute. Just enter a few assumptions into TIKR’s valuation model and see what NVIDIA could be worth. Start from Wall Street consensus estimates, or adjust the inputs to reflect your own view of the business. It’s free to use.
Disclaimer:
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