Jeremy Grantham warns AI boom pushed U.S. stocks to record high

Jeremy Grantham, a longtime investor known for bearish market calls, told CNBC's "Squawk Box" that AI-driven enthusiasm has carried U.S. equities to valuations never before seen in the country's history — and that a severe downturn may lie ahead.

"Based on the value of the stock market compared to GDP, with modifications, this is the most expensive market in American history," Jeremy Grantham, co-founder of investment firm GMO, told CNBC.

Among the metrics Grantham cited was a ratio comparing total stock market value to gross domestic product — a measure sometimes known as the Buffett indicator — which has climbed to 235%, putting the market at roughly two and a half times the size of the underlying economy. Legendary investor Warren Buffett once said that when the indicator "approaches 200% — as it did in 1999 and a part of 2000 — you are playing with fire."

Grantham said the closest historical parallel is the technology bubble of 2000, though he acknowledged the timing of any potential peak remained uncertain.

The GMO co-founder also flagged the recent public-market debut of SpaceX as a warning sign. Despite the company's roughly $2 trillion valuation, Grantham said historians may eventually view its listing as a textbook signal of a market at its zenith — "one of the defining peaks of all time," he said, adding: "It's the thing you see around the top."

To illustrate the risks AI enthusiasm can pose even to companies that ultimately succeed, as a case study in AI-era risk, Grantham invoked Amazon, which shed 92% of its stock value in the dot-com collapse before eventually dominating the markets it had once only promised to disrupt. He said a similar crash for an AI-era giant was "very likely," though he left open the question of which firms would ultimately endure.

Investors are increasingly worried about whether spending on AI will actually lead to profits. Analysts and venture capitalists have pointed out risks like crowded markets, complex investment structures, and the chance that falling public company values could affect private AI firms. Microsoft's stock has also dropped, hitting a 52-week low as investors become frustrated with the high costs of building AI infrastructure.

It is not the first time Grantham has sounded the alarm: a March 2024 blog post carried a stark message about U.S. equity prospects, yet the rally pressed on regardless — a reminder of the difficulty of translating bearish conviction into accurate timing.