There is much ballyhoo about there being a potential artificial intelligence (AI) bubble and overvaluations of the Mag 7 stocks in the S&P 500. We would take that message from the mainstream media as just that. Ballyhoo. The metric they refer to is valuation, meaning the price to earnings ratio. In other words, the view is that the current share prices don’t justify their current earnings. Probably true but we are at the genesis of a CapEx supercycle driven by the convergence of AI, energy infrastructure and digital platforms. Let’s break this down.
“Markets don’t peak simply because valuations are high; they peak when liquidity dries up.” – Dr. James Thorne
Valuations
Markets don’t peak on valuations alone; they peak when liquidity dries up. Current fears of an AI bubble are misplaced. Valuations are indeed high. The historical S&P 500 P/E ratio is 19.4X. Currently, it’s 30.4X. Nvidia, as an example, is 54.1X at the same time, humdrum Costco is 50X, and no one talks about that. Elevated valuations show investor confidence in the future value of the stock.
A good example would be Amazon. On September 9, 2014, Amazon had a share price of $15.63 with an eye watering P/E of 1,078. Recently, on November 18, 2025, Amazon had a share price of $228.10 and a P/E ratio of 32.9. It grew into its large sized P/E ratio.
Today’s revolution – AI, and digital infrastructure is not speculative froth but a global economic restructuring. We are in the early innings of a secular transformation, not a replay of the dot-com bust. Capital expenditure (CapEx), companies investing in themselves, is shifting toward core infrastructure, data centres and energy generation to power the change. This could be viewed as a CapEx Supercycle driven by the convergence of AI, energy infrastructure and digital platforms like ChatGPT.
One of the prerequisites of all this is power generation to run the data centres which use eye watering levels of energy to power servers, network equipment and massive cooling systems to keep them all running. These data centres which can cover tens of thousands of square feet are being built with their own dedicated modular nuclear power generators. To power the data centres each of these generators put out as much as 1 Gigawatt of power. A Gigawatt of power is enough to power a full city of a million people.
Liquidity
Liquidity, or the ability to turn assets into cash, is a key indicator of financial health. If a company can easily sell assets to create cash or raise cash easily in the public markets, it allows them to build their business by CapEx to create higher revenues and earnings, which are drivers of share price. Seems simple, right? The key fact here is this. In the U.S., President Donald Trump has declared that all CapEx is 100% tax deductible from now through to 2030. That’s free money to businesses. “Wait, what, so if I spend money to make my business more productive and profitable, I can deduct this from income, which is reflected in earnings and share price, am I right?”
As a result, there is an abundance of liquidity currently because of this tax deductibility. This bodes well for the U.S. equity markets. The key point here is that bubbles burst due to liquidity constraints, not high valuations. Current conditions favour an expansion in the level of output of the economy and therefore an increase in the supply of goods and services, which in turn stimulates further economic growth. This is not your run of the mill bubble yet.
Don’t just take our word for it, others think so too. According to the well-respected U.S. research firm Evercore ISI, the year end target for the S&P 500 is still 7,000 from the current 6,738. That’s 4% in the next six weeks. Their year end target for 2026 is 8,000. Albeit with a 10% correction somewhere in there, but that is normal, healthy and expected.
As always, if you would like to chat further about this or have questions. Please don’t hesitate to get in touch.