Eisman warns billions in AI spending risks market correction

The stock market will suffer a significant correction if the AI sector fails to deliver on expectations, Steve Eisman, the investor who famously bet against subprime mortgages, said Monday.

"If AI doesn't succeed, the market will have a big correction," Eisman, host of "The Real Eisman Playbook" podcast and former senior portfolio manager at Neuberger, said during an appearance on CNBC's "Squawk Box."

Eisman pointed to the massive capital expenditure commitments from hyperscale cloud providers as the primary risk factor. Companies including Microsoft Corp., Meta Platforms Inc., Alphabet Inc. and Amazon.com Inc. have collectively pledged tens of billions of dollars on AI infrastructure, from data centers to graphics processing units, with limited clarity on when those investments will generate returns. If any hyperscaler cuts its AI spending, the market could go "straight down," Eisman said.

The warning carries weight given Eisman's track record. He was among the first investors to identify the subprime mortgage bubble, a bet that generated massive returns for his firm and was chronicled in the book and film "The Big Short." His shift from banking to AI as the central risk to the US economy reflects how deeply the technology has become embedded in market valuations.

The S&P 500 and Nasdaq Composite have rallied to multiyear highs, driven largely by enthusiasm around generative AI. Nvidia Corp., the dominant supplier of AI chips, has seen its market capitalization swell as data center revenue surged. The concentration of market gains in a handful of AI-related names has left the broader market vulnerable to a sharp correction if the spending fails to translate into revenue growth.

The scale of AI investment has drawn comparisons to past technology cycles, including the dot-com era. Hyperscalers are building data centers at an unprecedented pace, ordering hundreds of thousands of graphics processing units each quarter. Yet the revenue payoff remains uncertain, with companies cautioning that AI infrastructure costs will weigh on near-term profitability while AI services contribute to revenue only gradually.

Eisman's comments add to a growing debate on Wall Street about whether AI spending has reached unsustainable levels. The tech-heavy Nasdaq has been the primary beneficiary of the AI rally, and any pullback in capital expenditure could trigger a broad rotation out of technology stocks into other sectors. Utilities and energy companies, which have benefited from AI-driven electricity demand, could also face headwinds if data center buildouts slow.

Investors are watching upcoming earnings reports from major hyperscalers for signs of spending discipline or any indication that returns on AI investment are falling short of expectations. The Federal Reserve's interest rate trajectory adds another layer of uncertainty, as higher borrowing costs could pressure the leveraged balance sheets of companies funding large-scale infrastructure projects. A sustained rise in Treasury yields would further challenge the elevated valuations of AI-related equities, which trade at significant premiums to the broader market.

This article is for informational purposes only and does not constitute investment advice.