GMO issues a decisive alert: AI stocks are in a classic investment bubble, echoing the dot-com mania, and urges investors to favor global value and non-US small-cap stocks—especially in Japan—over hyped AI plays.
Global investment powerhouse GMO is sounding a new alarm for investors: the surge in artificial intelligence stocks is showing unmistakable signs of a classic investment bubble—a warning that could reshape how investors approach the market in late 2025.
This alert, delivered by Ben Inker, GMO’s co-head of asset allocation, follows a year marked by astronomical returns in AI-related shares and mounting comparisons to the frothy peaks of the dot-com era. GMO’s message: while the headlines continue to hype AI, investors should be thinking defensive—with a strong tilt toward undervalued segments worldwide.
AI Mania: Parallels With History’s Biggest Bubbles
Inker argues that today’s market dynamics mirror those seen at the peak of the late 1990s bull run. In particular:
- Valuations for AI stocks have reached levels reminiscent of the dot-com bubble, with some quantum computing names soaring by 1200% within a year.
- Speculation is rampant, as “true believers” drive prices higher with little regard for underlying fundamentals.
- Market narratives suggest this time might be different, but such claims have historically preceded sharp corrections.
AI isn’t unique in this pattern—major asset bubbles, from tech in 2000 to housing in 2008, followed similar parabolic price action and belief in a ‘new paradigm.’ According to GMO’s analysis, the warning signs for AI are now flashing red.[Business Insider]
This Isn’t a Market-Wide Crash Signal
It’s crucial to understand that GMO’s warning targets the AI trade—not the broader market. Unlike 2008, when wholesale risk needed to be dialed back, GMO believes opportunity abounds in asset classes that remain overlooked and undervalued. There’s no call to move the majority of a portfolio into defensive assets or cash; instead, the message is about prudent rotation.
Historically, investors who recognized bubbles early and re-allocated to value outperformed through subsequent drawdowns. This was especially true in 2000, when sidestepping the dot-com meltdown spared value-focused investors significant pain.[Business Insider]
Where GMO Sees Real Value Today
GMO highlights two key areas for conviction:
- Developed market value stocks: These companies have underperformed during the AI surge and now offer lower price-to-earnings ratios and more resilient balance sheets.
- Non-US small-cap value stocks: Particularly in Japan, where structural reforms and corporate governance changes are unlocking shareholder value.
Examples include funds like the Avantis International Small Cap Value ETF (AVDV) and iShares MSCI International Value Factor ETF (IVLU), which focus on these pockets of global value.
Investor Playbook: Prudent Rotation, Not Wholesale Retreat
For investors wary of missing further AI gains, but unsettled by bubble signals, GMO argues that shifting some exposure from high-flying tech to international value doesn’t mean giving up long-term returns. These areas now trade at “even compelling valuations”—a rare window for diversification and risk management.
- Dynamic, valuation-driven asset allocation has repeatedly protected investors in major bubbles.
- Unlike during the Great Financial Crisis, investors can still hold risk assets—just not those swept up in speculative manias.
- The risk/reward profile of value stocks and non-US small caps is far more attractive today.
What to Watch: Sentiment, Flows, and Contrarian Positioning
With headlines dominated by AI, investor sentiment is near euphoric—often a contrarian indicator. Fund flows, media narratives, and rising retail participation suggest it is time to at least partially de-risk.
Those heeding GMO’s call can benefit by tilting away from concentrated winners and into asset classes with more room to run and downside protection.
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