27 Years of Veteran Perspective: The AI Bubble Burst and Market Major Adjustment Approaching—3 Warning Signs Investors Must Know

Gareth Soloway, a trader with 27 years of experience on Wall Street who has lived through the dot-com bubble and the 2008 financial crisis, is issuing a serious warning about the current market situation. According to his analysis, the market valuation driven by the AI concept is heavily front-running future profits, and the market is facing a critical turning point. He particularly warns that the current correction phase is “just the beginning,” and a 10% to 15% decline is only the start. From his perspective, based on past bubble collapse cycles, the structural vulnerabilities of the AI bubble and dangerous market psychology are coming into focus.

The Triple Structure of the AI Bubble: Valuation Metrics, Capital Flows, and Data Center Limitations

The reason the AI bubble is reaching a crisis point is not due to a single factor but the convergence of multiple structural issues.

First, regarding valuation metrics: Current stock valuations incorporate corporate profits projected over the next five years (until 2030) or even beyond. In other words, unrealized future profits are already priced in, creating an extremely high-risk situation. Over the past two years, 75% of the gains in the S&P 500 index have been driven by AI-related stocks, which are leading the entire market.

Second, from the perspective of capital flows: For example, AMD has received billions of dollars in investments from OpenAI, in exchange for granting OpenAI the right to purchase 100 million shares of AMD stock. Nvidia has also provided funding to OpenAI and received chip purchase rights in return. This is a typical “Ponzi scheme” designed to sustain the boom. However, in reality, the AI ecosystem is not as stable as it appears. Many companies admit that “AI is great, but monetization is difficult at this stage,” indicating that the actual foundation of the AI bubble is extremely fragile.

Third, the reality of stagnating data center construction: The rapid rise of AI-related stocks was mainly driven by the need for large-scale data centers and increased chip demand. However, Microsoft has canceled two data center projects, and Micron has canceled one, due to severe power shortages. Securing enough power for these data centers exceeds the capacity of existing power grids, forcing reliance on new power supplies. As a result, electricity bills for consumers could potentially triple.

An additional concern is the accounting practices of hyper-scale data center companies. They depreciate chips over a seven-year period, which is highly unreasonable. Data shows that due to rapid technological advances and continuous high-load operations, the value of chips purchased at retail price can drop to 10% of their original value within two years. Spreading depreciation over seven years makes reported profits appear excessively high, leading these hyper-scale companies to significantly overstate their earnings.

Signal of Semiconductor Sector Collapse—Market Top Indicated by the 200-Week Moving Average

From a technical analysis perspective, the market is already showing signs of topping out. The VanEck Semiconductor ETF (SMH), which holds major semiconductor companies like Broadcom, Nvidia, and AMD, displays a clear pattern on its weekly chart.

By observing the deviation from the 200-week moving average, a pattern repeats across cycles. During the bullish run from 2020 to 2021, the maximum deviation from the 200-week moving average reached 102%, followed by a 45% correction across the market. Similarly, in 2024, the deviation again hit 102%, with a 40% correction afterward. In recent weeks, SMH has again reached a 102% deviation, strongly suggesting that the next correction is imminent.

The 200-week moving average acts as a “base camp” for the market. When prices deviate significantly from this line, they tend to eventually revert to previous levels. Based on current data, the semiconductor industry is approaching a major correction phase, which could ripple through the entire tech sector.

The Market Correction Is Just the Beginning—Reasons for a 10% to 15% Drop

Market structural vulnerabilities:
Looking at the weekly chart of the S&P 500, a clear trendline has formed from the COVID-19 lows in 2020 to the bear market lows in 2022, and the index is currently touching this upper trendline. Historically, when the market touches this upper boundary, a bearish reversal occurs.

This suggests that the correction phase has already begun, and the S&P 500 may have already peaked. Goldman Sachs CEO David Solomon recently stated in Hong Kong that the stock market is likely to experience a 10% to 20% correction within the next 12 to 24 months, a view also shared by Morgan Stanley’s CEO.

Dangerous aspects of market psychology:
The current volatility is partly due to “buying the dip” investors being misled by institutional investors and governments into believing that the market will not fall more than 2% or 3%. However, if a 10% to 15% correction occurs, many investors will be extremely surprised.

Importantly, funds do not completely withdraw immediately after a market top forms. In early stages of a top, like in 2007, a pattern of sharp declines followed by strong rebounds, then declines again, and subsequent rises, often occurs. This is because buyers are encouraged to buy the dips. The largest declines tend to happen late in the cycle, when everyone has given up and panic sets in.

Structural weaknesses in the economy:
Currently, about 90% of GDP growth forecasts are based on capital expenditures by major tech companies. A slight reduction in their investments could push the US economy into recession. Consumer spending is already showing signs of slowdown, and the real impact of inflation is more severe than media reports suggest. Companies like Cava and Chipotle are evidence of declining consumer expenditure, which forces firms to halt hiring.

Meanwhile, the business sector faces significant uncertainty. As former economic advisor Kevin Hassett pointed out, AI could improve productivity of existing employees, leading companies to reduce hiring of college graduates. Even major consulting firms like McKinsey are shrinking their operations as clients shift to cheaper, more efficient AI consulting firms.

Comparing Downside Risks of Bitcoin, Gold, and Stocks—Short-term Strategies and Long-term Outlook

Asset-specific downside scenarios:
Currently, investors face three major asset classes with the following short-term downside risks:

Bitcoin: The current price is about $89,430. Technical analysis indicates key support levels around $73,000 to $75,000 (many past highs and breakouts have been supported at this level). If the bears dominate, Bitcoin could fall back to $73,000–$75,000 or lower, representing about a 23% decline from current levels.

A critical resistance line connects the 2017 bull market high and the early 2021 high, which has perfectly predicted all recent highs. Only if Bitcoin can break above this resistance line might it justify a move toward $127,000, $128,000, or $130,000.

Gold: Gold is currently trading above $4,000, but experts believe that the bearish sentiment has not fully cleared, leaving room for a decline. Historically, before the next major bull run, gold tends to shake out weak holders. Comparing gold price patterns from 1979 and 2025 shows similar behavior: after an initial surge, it consolidates and then rises for several weeks. Based on historical precedent, gold could drop to $3,600–$3,500, about 12% below current levels, before entering a new upward phase.

However, the current situation differs from 1979. Back then, Volcker was raising interest rates; now, Powell is cutting rates. In 1979, debt-to-GDP was 32%, now it’s 130%. Given this, it’s almost certain that gold will surpass its previous all-time high and reach $5,000 by next year.

Stock market: The S&P 500 is expected to see a correction of 10% to 15%, which would bring it back to around 6,100, a previous pivot high and current technical support level.

Asset allocation strategy:
In terms of short-term downside ranking, Bitcoin has the highest volatility and risk, followed by stocks, then gold. Considering risk-adjusted returns, gold appears relatively less risky at these target levels, making it a priority in asset allocation, followed by Bitcoin.

Structural concerns with Bitcoin: Leverage risk:
A more cautious view on Bitcoin compared to gold stems from the high leverage within the system. Companies like MicroStrategy hold large amounts of Bitcoin with leverage, which is highly concerning. If these companies are forced to liquidate, Bitcoin could experience an unprecedented sharp decline.

In contrast, gold is more diversified, held by central banks worldwide, and can’t be printed at will by governments, making panic selling less likely. Over the long term, gold is generally considered a safer investment.

Cautious approach to Ethereum:
Altcoins also warrant caution. Ethereum, in particular, has support levels around $2,800 to $2,700, which are critical support zones. The current price is about $2,970.

Policy Shift and the Crisis of the “Great Cycle”

Implementation of quantitative easing and liquidity injection:
The Fed is approaching the end of QT and is shifting toward QE. This policy change effectively injects liquidity into a system already in a bubble.

As Ray Dalio points out, this shift, regardless of how it’s framed, is fundamentally easing. The historical pattern of debt increasing during economic expansion and decreasing during recession is not evident in this cycle. Instead, debt continues to accumulate, fueling larger bubbles, which inevitably lead to bigger crashes.

Recognition of a historic turning point:
The current situation may be more severe than the 2008 financial crisis, and many are struggling to grasp its scale. The US is approaching or in the midst of a cycle problem that spans a century. Most people who experienced the Great Depression are no longer alive. We seem to have forgotten the lessons—prudent financial management, avoiding excessive consumption, and not piling up enormous debts.

Warning to Young Investors: Protect Capital and Prepare for Systemic Risks

The illusion that “markets can only go up”:
After the COVID-19 pandemic, many new investors entered the market, which then experienced a V-shaped recovery, with indices hitting new highs within a month. Many young investors believe the market can only go up. However, based on my experience since 1999, it took over 15 years for the Nasdaq to reach its previous peak after the dot-com bubble burst. The recovery could take even longer.

The importance of capital preservation:
The key is to protect your capital. Trade with discipline, manage risks carefully, and recognize the systemic risks posed by current financial and debt conditions. At least 60–70% of US households may already be in recession, and the market’s rise is merely concealing this reality.

If stock prices fall and high-income consumer spending slows, regardless of AI investment levels, the economy will weaken. If the AI bubble bursts simultaneously with a market correction, the shock could be larger than expected.