The AI Bubble Is in the Earnings

Most discussions of an AI bubble focus on valuations. The more important risk may be the quality of the earnings those valuations rest on.

Reported profits across parts of the AI stack are being supported by a dense set of interconnected mechanisms. Large fiscal deficits and cheap capital boost demand that can look organic. Circular financing routes investor capital into startups that then buy the same investors’ hardware or cloud capacity. Accounting choices extend depreciation lives, capitalize R&D, and lean on non-GAAP adjustments. Buybacks and high operating leverage amplify earnings growth. Some demand reflects inventory build and defensive capital spending rather than immediate end-user pull. Subsidies and favorable financing terms further improve reported returns.

None of these mechanisms is necessarily fraudulent. Together they create earnings power that is more fragile than it appears. When capital conditions tighten or one part of the chain slows, the correction can hit the “E” in P/E rather than just the “P.” Valuation resets are common. Earnings compression driven by the simultaneous unwinding of circular and subsidized flows is more severe.

This Ledger Entry expands how the reader thinks by shifting the bubble debate from price multiples to the structural durability of the earnings currently supporting those multiples.