As artificial intelligence attracts trillions of dollars in investment worldwide, valuation expert and NYU Stern School of Business professor Aswath Damodaran is warning that the risks associated with the current AI boom may be far greater than those seen during the dot-com era.
Damodaran, known as the “Dean of Valuation,” believes the ongoing AI race differs significantly from the internet boom of the late 1990s, not only in the scale of investment involved but also in the way the sector is being financed. While he stopped short of predicting an imminent crash, he said history tells that periods of intense market enthusiasm are often followed by a correction.
AI boom is built on unprecedented infrastructure spending
Speaking on the Excess Returns YouTube channel, Damodaran said the AI wave has triggered one of the largest investment cycles he has witnessed in business history. Unlike the dot-com period, when many companies focused on building websites, software products and online services with relatively limited infrastructure spending, today’s AI leaders are investing heavily in data centres, advanced chips, computing networks and energy-intensive systems required to develop and run sophisticated AI models.
“The dot-com boom and bust had no huge capital expenditure in that cycle. In fact, there was very little traditional Capex, or even R&D, driving it. People started apps. They basically started going on it.” According to Damodaran, the scale of spending on AI infrastructure has little precedent in modern business history.
He added, “This has been the biggest infrastructure run-up I think I’ve ever seen in business. You can go back and compare it to the automobile business 100 years ago. The amount of money that’s being put into AI Capex is immense, which means that when the correction comes, the pain will be more intense.”
Debt-funded growth could amplify risks
His concerns extend beyond the amount of money being invested. Damodaran argued that the financing structure behind the AI boom could make any downturn more severe. During the dot-com era, much of the funding came through equity markets, meaning investors largely absorbed the losses when technology stocks collapsed. While many internet companies disappeared and shareholders suffered significant declines in wealth, the damage remained relatively contained within financial markets.
The current AI expansion, however, is increasingly being supported by debt, with a growing share of funding coming from private capital rather than traditional banking channels. Damodaran said this creates the possibility that a slowdown in growth or a sharp correction could trigger broader financial stress.
“There’s a very real chance that if there’s a correction and companies start having problems, that problem is going to show up as distress and default, and that really doesn’t stay restricted. It spills over into the rest of society.”
Lessons from previous financial crises
Drawing a comparison with previous financial crises, Damodaran said his concerns are centred less on stock market losses and more on the consequences of companies being unable to meet debt obligations if expectations around AI fail to materialise.
“I’m not saying it’s going to be 2008, but 2008 is an example of what happens when lenders overreach, when they lend money at too low a rate, and the correction comes. The pain spills over.”
He added that debt-driven excesses can have consequences that reach well beyond investors and financial markets.
“So that is my concern with this big market illusion: the potential societal cost of having to deal with debt coming due that you’re unable to pay. It’s much more painful than your share price dropping 90 per cent and you feeling the pain.”
History suggests a correction is likely
Damodaran said the historical pattern of technology booms suggests that periods of extraordinary optimism are rarely permanent. According to him, there is no guarantee that the AI sector will experience a collapse similar to the dot-com bust. However, he believes that some form of correction remains likely. If that happens, the combination of unprecedented infrastructure spending and rising debt exposure could make the fallout more consequential than the market downturn that followed the internet boom more than two decades ago