MICHEL MARTIN, HOST:
Here's a question with trillion-dollar consequences for the economy. Are we in an AI bubble or not? Planet Money's Jeff Guo runs us through some of the signs economists are looking for to get an answer.
JEFF GUO, BYLINE: If you want to stir up some frothy drama, ask an economist about bubbles.
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EUGENE FAMA: The word bubble drives me nuts, frankly.
GUO: That's Nobel Prize winner Eugene Fama talking to us on the Planet Money podcast back in 2013, when he issued a famous challenge to his fellow economists. Try and predict the next financial bubble. Robin Greenwood has been working on that challenge for years.
ROBIN GREENWOOD: We were hoping that there was going to be some amazing marker of a bubble.
GUO: Robin is a professor at Harvard Business School. He says a bubble is essentially when the market gets carried away, gets over excited about something. But a lot of times, the market gets excited for good reason. That's what he and his colleagues discovered when they went digging into the history of the U.S. stock market.
GREENWOOD: So we wanted to look at every situation that was maybe a bubble and to say, what happens next? So what happens over the next 24 months?
GUO: They found that about half the time, what seemed like a bubble wasn't. For instance, in the late '70s, the price of health care stocks more than doubled in the span of two years. But that wasn't a bubble. Instead of popping, those stocks just kept going up and up. The same story goes for aircraft stocks in the '50s and entertainment stocks in the '60s. So is there any way to tell if something's a bubble before it pops? Well, Robin and his colleagues did find some clues that are statistically associated with popping bubbles of the past.
GREENWOOD: The first thing you're looking for is overvaluation.
GUO: Basically, near the peak of a bubble, you tend to see companies where the stock price is really high relative to that company's earnings. That is a bubble clue. It's a sign that maybe investors are overoptimistic. They're hoping this company is going to make a lot more money in the future. The economists found a bunch of other clues, too. For instance, volatility. That's when you see stock prices in an industry jumping around a lot. There's also acceleration. That's when stock prices aren't just going up, but they're going up faster and faster. So we asked Robin to take all his bubble clues and answer our big question right now. What is going on with AI stocks?
GREENWOOD: I think things look expensive, but just not as expensive as they have been during peak bubble.
GUO: So for the overvaluation clue, Robin says, stock prices for AI companies are pretty high right now, relative to how much money these companies are making. But we're not yet seeing the kind of extreme valuations we saw during, say, the dot-com bubble of the '90s. Now, we are seeing more volatility in parts of the stock market, so that's a clue. But then there's not much acceleration. Stock prices for companies like Microsoft and Meta are going up, but at the moment, they don't look like they're going up exponentially.
GREENWOOD: If I had to say what I think it is, I would say we're early bubble.
GUO: And, OK, if it sounds like Robin is hedging a bit, that's because he says these bubble clues they found, they are not slam dunk indicators. To some extent, Eugene Fama's challenge still stands. It's still really, really hard to say for certain that's a bubble, at least until the bubble pops.
Jeff Guo, NPR News.
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