For the past few months, I have been writing a novel with the assistance of Gemini, ChatGPT and Claude. Each has specific strengths. They have provided a huge amount of service while costing me nothing. (Although Gemini has been continuously available, ChatGPT and Claude paused repeatedly after doing some work and I had to wait several hours for service to recommence.)

AI is really amazing. For example, I asked ChatGPT to transform a photo of a modern yeshiva study room into a yeshiva study room in Salonika in 1776 with a Jewish man delivering Talmud volumes on a hand cart while the others express delight. This was the result.

[See picture on discussion.fool.com - Openais revenue surprise]

This is only one of hundreds of services I have received from AI. Of course, this is only a tiny fragment of AI’s capabilities. Gemini is said to have 900 million clients internationally. ChatGPT has recently released solutions to numerous mathematical problems.

Hundreds of billions of dollars are being invested into AI. The question is: given that the majority of AI company earnings come from other AI companies and only a tiny fraction from real end-users outside the AI ecosystem, how will the high price of AI stocks be justified? This impacts every investor who owns an S&P500 index fund since 40% of the cap-based SPX is a handful of fabulous AI companies and the not-so-fabulous remaining 495 stocks are going nowhere.

nytimes.com - Openai revenue safety
The Fallout From OpenAI’s Revenue Surprise

News that the artificial intelligence giant’s sales weren’t growing as fast as investors had expected added to concerns about the A.I. boom.
By Andrew Ross SorkinBernhard WarnerSarah KesslerMichael J. de la MercedNiko GalloglyBrian O’KeefeSri Muppidi and Ian Mount, The New York Times,
Oct. 9, 2026

...
OpenAI’s annualized revenue, a measure favored by start-ups to demonstrate revenue momentum, was about $50 billion at the end of last month, up from roughly $28 billion at the end of June, an OpenAI spokesperson told DealBook.

That’s significantly lower than the $70 billion figure given to investors last month...

The revision tanked A.I. stocks. Shares in Nvidia, Oracle and Microsoft sank on Thursday’s news.

This highlights the interconnectedness — and the potential fragility — of the A.I. boom, much of whose fortune rides on the continued success of OpenAI and Anthropic.

It also underscores the risks posed by basing investment decisions on pro forma revenue measures. Investors are increasingly turning to data from companies like the market intelligence firm Sensor Tower and the billing platform Ramp to help calculate their own financial models... [end quote]

Valuation models require an input of the cost of capital. With long-term interest rates rising, the stock valuations will fall. This is especially true of growth companies whose profits are expected to grow in the future since the valuation model is an exponential function.

If AI turns out to be a classic over-investment cycle—reminiscent of the 1890s railroad boom or the 2000 telecom fiber-optic glut—where the technology ultimately changes the world, but the early investors lose their shirts due to overcapacity and price wars, the fallout for passive index investors will be severe. Because passive investing is cap-weighted, investors are currently forced to hold the highest concentration of risk precisely where valuations are most stretched.

I think this will be the case.
The core tension for today’s AI infrastructure builders—and by extension, anyone holding a cap-weighted S&P 500 index fund—is the time-value gap. Nvidia, Microsoft, Amazon, and Google are spending hundreds of billions today on silicon, power grids, and data centers that depreciate rapidly.

Even if AI transforms the world and becomes profitable eventually, I think that early investors will lose patience with this money-sucking model. History shows that bubbles burst when the next enthusiast backs away and the peak speculators can’t find buyers.

With interest rates rising this may be sooner than expected.

Wendy