Three decades after Alan Greenspan warned of “irrational exuberance,” Howard Marks says one half of that phrase is beyond dispute. “There’s no question about the fact that we have exuberance,” the Oaktree Capital co-chairman said.
“The question is, is today’s exuberance irrational?”
Marks, a lifelong value investor, argues no one can answer definitively. Nobody, he says, has told him exactly what AI will be able to do, when, for whom, or how much profit it’ll produce.
Artificial intelligence, in his view, is “a concept” whose parameters can’t be defined—likely “the most powerful force any of us have ever seen,” yet the least specifiable.
Elevated But Not Expensive
Marks noted that the market is elevated, not unhinged. The S&P 500 trades at roughly 23 times earnings, against an 80-year average of about 16—about 50% higher.
But that compares with 32 at the 2000 peak, and with the Nifty 50 of the late 1960s, when Xerox Holdings Corporation (NASDAQ:XRX), International Business Machines Corporation (NYSE:IBM), Polaroid and Eastman Kodak Company (NYSE:KODK) fetched multiples of 60 to 90.
The Magnificent Seven, excluding Tesla, Inc. (NASDAQ:TSLA), sit in the 30s. “That doesn’t sound so expensive to me,” he said.
Multiples alone are “too simplistic,” Marks added. Today’s giants are less capital-intensive, and because their product is intellectual “rather than a piece of metal,” incremental profitability is far higher. Growth rates, he said, are unlike anything he has witnessed.
Beneath the equity market, however, Marks sees a long tail of easy money. Forty-plus years of falling rates and 17 years of expansion since March 2009 have been “salad days” for alternatives.
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Every Revolution Has Its Bubble
Marks places AI in a lineage of transformative technologies. Breakthroughs like the railroads in the 1860s, radio in the 1920s, computers in the 1950s and ’60s, and the internet in 2000. Each brought excitement, a winner-take-all race, and capital that “flowed in like water”—too much of it, into too much infrastructure, at prices too high.
“If this technological innovation with its exuberance doesn’t produce a money-losing bubble, it’ll be the first,” he said. The optimist’s rejoinder, “this time it’s different,” is, Marks notes, what “they always say.”
He also separates efficiency from profit, citing Buffett’s 2000 observation that the internet would add to efficiency but not necessarily profitability. If hyperscalers, OpenAI, Anthropic and startups all “engage in battle” at enormous cost, who captures the gains?
If AI is chiefly a labor-saving device, Marks suggests the beneficiaries may be shipping companies, retailers and warehouses. These are the customers of a price war, not its combatants.
A Spectrum, Not a Binary
Marks frames AI exposure as a spectrum. Hyperscalers—Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc. (NASDAQ:GOOGL) (NASDAQ:GOOG), Meta Platforms, Inc. (NASDAQ:META), Microsoft Corporation (NASDAQ:MSFT)—offer moats and vast cash flow but diversified businesses that would blunt gains if AI “octuples.”
Established leaders like NVIDIA Corporation (NASDAQ:NVDA), OpenAI, and Anthropic are unlikely to be obsoleted, though he’d bet anyone forecasting Anthropic’s 2036 earnings won’t land within 50% of the truth. Meanwhile, startups are “lottery tickets“: most holders lose everything, and a few become incredibly rich.
The task, he says, is to recognize where an asset sits and calibrate your activities accordingly, accepting that much of this is closer to speculating than analytical investing.
Forecasts Need Probabilities
Marks insists dealing with the future requires two things- a forecast and a judgment of its probability of being right. Investors who are “highly confident” about AI’s trajectory are “probably making a big mistake.”
Yet inaction is its own error. “One of the greatest mistakes you can make is being not optimistic enough,” he said; another is declaring the future too unclear to invest.
Borrowing from Nassim Taleb, Marks contrasts investing with dentistry, where filling a cavity correctly works every time. Investing has no such physical rules—even Buffett credits his record to about 12 great decisions.
“If you’re the kind of person who wants to be successful every time,” Marks said, “become a dentist.”
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