A “rational bubble” in AI and a surge in corporate debt are creating a fragile economic environment where minor “accidents” could trigger a broader sell-off.

Distinguished economist Mohamed El-Erian warned in a conversation with Yahoo Finance Invest that while the aggregate value of AI is significant, the market has entered a “rational bubble” where overinvestment is common.

He cautions that while foundational models may succeed, many companies are simply attaching “AI labels” to their operations to attract capital. This speculative environment suggests that eventually “there will be tears” as investors face losses from these overvalued entities.

Moody's Analytics echoes this sentiment, noting that stock prices for AI companies appear “frothy” and potentially overvalued. In their “AI Falls Flat” scenario, a significant sell-off could evaporate nearly $20 trillion in shareholder wealth.

The ‘Magnificent’ Risk

Market leaders Nvidia Corp. (NASDAQ:NVDA) and Microsoft Corp. (NASDAQ: