- John Hussman said he believes the AI bubble will go up in a "ball of flames."
- The permabear noted that corporate profits were rising alongside public and private debt.
- He sees the government's pullback on fiscal support as a possible trigger that could pop the bubble.
John Hussman is sounding the alarm on another omen in markets.
The famed bubble-watcher and president of Hussman Investment Trust has long warned that the bull run in stocks will end badly, and he's pointing to one signal he thinks hints at how the AI bubble could burst.
In a note on Sunday, he flagged an emerging pattern in the split between soaring corporate profits and rising public and private debt.
Corporate America has seen profits explode, largely driven by bullishness around AI and a host of mega-deals in the tech sector. After-tax profits adjusted for inventory valuation and capital consumption grew more than 10% year-over-year at the end of 2025, according to data from the Commerce Department.
Hussman said he believes expectations for profit growth driven by AI are "wildly over-optimistic," likening the current market to a kind of investment fraud.
"The defining feature of a Ponzi scheme is that it persuades investors to pay for future cash flows that, at least in part, don't actually exist, while creating the impression that those cash flows imply an attractive return on the price investors pay," Hussman said, pointing to record valuations in the stock market and expectations for AI to pay off in the future.
At the same time, debt is soaring. The total federal debt recently swelled to over $38 trillion, according to the Treasury Department, but it's not just the government that's borrowing tons of cash. Households and companies are also racking up debt.
When including debt held by households and foreign trading partners, corporate free cash flow is an "exact mirror image" of deficits, Hussman said, suggesting that profits in the corporate sector are largely being fueled by deficits in other areas of the economy.
Hussman, who successfully called the dot-com bubble and has warned for years that markets could be mired in the "third great speculative bubble" in history, said he doesn't believe technological advances contribute to net economic growth. The financial impact of new tech has "been primarily to widen income disparities," he said, suggesting the government will need to provide more support to households as wealth becomes concentrated in fewer hands.
"If we allow for the possibility that the US will eventually move back to fiscal stability, it follows that corporate profit margins will also retreat from their current extremes," Hussman speculated. "That's the magic of a Ponzi scheme — everything works fine as long as nobody questions that the future cash flows are a-comin'.'"
Hussman said his firm is holding back from making a concrete forecast about when the stock bubble might burst, as the features that have typically caused valuations to drop in the past "haven't been sufficient" this time around.
"My opinion remains that this bubble will go down in a ball of flames," he said.
Concerns about the AI trade have picked up this year amid concerns about valuations and how artificial intelligence could disrupt the business models of various industries. While the tech is still one of the market's best-performing areas, the sector has started to lag behind other groups this year, such as energy and materials.
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