The rapid rise of artificial intelligence is showing all the classic signs of a financial bubble, according to renowned economist Ruchir Sharma, who warns it could collapse by 2026 if interest rates rise. In an interview with Nicolai Tangen, CEO of Norges Bank Investment Management, Sharma outlined why the current AI boom mirrors past market manias, particularly the dot-com bubble, and why a sharp downturn may be imminent. Sharma’s framework for identifying bubbles rests on four key indicators—what he calls the “four O’s”: overinvestment, overvaluation, over-ownership, and over-leverage. He argues that the AI sector is now exhibiting all four. Massive spending on AI infrastructure by companies like Meta, Amazon, and Microsoft has led to unprecedented levels of overinvestment. Valuations of leading AI firms have soared, often detached from long-term earnings and cash flow, signaling overvaluation. At the same time, Americans are holding a record share of their wealth in stocks—much of it concentrated in AI-related equities—reflecting over-ownership. Meanwhile, Big Tech companies, long known for their strong cash positions, are now taking on massive debt to fund their AI ambitions. Sharma noted that these firms have become the largest issuers of corporate debt in recent months, a hallmark of late-stage bubbles. He estimates that around 60% of U.S. economic growth this year is tied to AI—either through direct corporate spending or the wealth effect that boosts consumer spending among high-income households. Yet, outside of AI, the broader economy shows signs of weakness, making the country overly dependent on a single, high-stakes bet. Sharma believes the catalyst for a crash will likely be rising interest rates. With inflation still stubbornly above the Federal Reserve’s 2% target and the Fed having missed its goal for five consecutive years, pressure is mounting to halt rate cuts. If inflation rebounds due to AI-driven investment and spending, the Fed may be forced to raise rates again. Higher rates would increase borrowing costs and reduce the present value of future earnings—especially damaging for high-growth tech stocks. Sharma sees this as the trigger that could bring the AI bubble down, likely by 2026. Other investors share his caution. Greg Jensen of Bridgewater Associates called the AI surge “ahead of us” in terms of risk, while Mel Williams of TrueBridge Capital Partners warned of “a lot of carnage” over the next decade. Still, Sharma doesn’t dismiss AI entirely. He describes it as a “good bubble”—one that could deliver lasting benefits by boosting productivity and creating valuable infrastructure, much like past tech booms. But even beneficial bubbles can cause sharp corrections, and investors may suffer losses. He believes that after the AI frenzy subsides, quality stocks—those with strong balance sheets, high returns on equity, and consistent earnings—will outperform. These have lagged during the AI rally, making them a compelling opportunity ahead of a potential market shift.