Bill Dudley, a former president of the Federal Reserve Bank of New York, says the US stock market is in bubble territory, pointing to stretched valuations and a slowing artificial intelligence (AI) investment cycle.
Dudley made the comments on Bloomberg Television this week, as Treasury Secretary Scott Bessent moves to contain a sharp rise in long-term bond yields.
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Stretched Valuations Underpin the Bubble Call
Dudley pointed to the Shiller CAPE ratio, the Shiller cyclically adjusted price-to-earnings (CAPE) ratio, which sits near 41. That compares with a 25 to 30-year average of about 17, and a record of 44 set in December 1999. In simple terms, investors are paying far more for each dollar of company earnings than history suggests is safe.
He also cited the Buffett Indicator, the ratio of stock market value to gross domestic product (GDP), which stands around 240%. Warren Buffett has said readings above 100% signal an overvalued market. This indicator is suggesting the stock market is strongly overvalued.
The Buffet Indicator is pointing to a severely overvalued stock market. Image Source: Long Term TrendsAI Spending Faces a Slowdown
Dudley expects capital expenditure (capex) growth among AI hyperscalers, the large cloud providers building AI infrastructure, to decelerate in 2027. That would squeeze profit margins across the sector and its suppliers.
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He also questioned whether the industry can generate the estimated $2 trillion in revenue needed to justify current investment levels. Historically, he noted, excess returns from major technological booms tend to get competed away as rivals pile in.
Broadcom is reportedly negotiating a chip-financing package that could reach $100 billion. The deal would support Anthropics IPO plans, with the AI firm targeting a stock market debut as soon as October.
Treasury Moves Add to the Pressure
The 30-year Treasury yield surged above 5.3% this week, its highest level since 2007. The Treasury Department responded with a long-bond buyback increase, doubling the size of its debt repurchases.
However, Dudley said the fiscal backdrop complicates the Federal Reserves task regardless of the bond-market intervention.
“The Fed has to take the world as it is.”
— Bill Dudley, Bloomberg
The coming months may show whether AI capex growth slows fast enough to avoid a sharper market correction.