Archive · 5 Aug 2026
'Peak AI' behind us, Damodaran warns smaller firms face shakeout
A smart teacher named Aswath Damodaran, who teaches at New York University, studies companies and money.
He told a TV show called CNBC that the biggest excitement about artificial intelligence may already be over.
Artificial intelligence, or AI, is when computers learn to do smart things.
Lately, many people were buying shares in AI companies because they thought those companies would grow very fast.
Mr. Damodaran thinks the best time for that excitement has already passed.
He worries that smaller AI companies could get into trouble because they do not have as much money to survive hard times.
Some AI stocks have already dropped a lot in value.
He says the biggest technology companies are in the safest position, but even they are borrowing lots of money to build big AI projects.
He thinks people are buying AI stocks again mostly because they fear missing out, not because companies are earning more money.
He hopes everyone will check whether AI companies really make enough money from their big spending.
Aswath Damodaran, a New York University professor, told CNBC his bet is that the market hit 'peak AI' a few months ago.
He expects more consolidation and correction ahead, warning that the shakeout risk lies with smaller AI-focused companies rather than the Mag Seven.
AI-linked stocks have sold off sharply, with the Roundhill Memory ETF (DRAM) down 36% and the iShares Semiconductor ETF (SOXX) down 22% from recent highs.
Despite tech's rebound and fresh record highs for the Dow Jones Industrial Average and S&P 500, Damodaran says the recovery is driven by FOMO and investor psychology rather than fundamentals.
He calls the largest tech companies the 'most protected' players but warns their heavy debt-funded AI capital spending must deliver real earnings.
- Who
- Aswath Damodaran, a New York University professor and valuation guru
- What
- Stated that the market has already passed 'peak AI' and predicted more consolidation and correction, with smaller AI-focused companies facing the biggest shakeout risk.
- When
- Monday, in a CNBC interview (specific date not stated in the article)
- Where
- Not specified in the article
- Why
- Because he believes AI valuations are not supported by business fundamentals and smaller firms lack the financial resources to absorb an extended downturn.
Market Optimists
AI Skeptics (Damodaran)
AI market direction
Market Optimists
Technology stocks have rebounded and major US indices hit fresh record highs as investors return to beaten-down AI names.
AI Skeptics (Damodaran)
The market already passed 'peak AI' and will see further consolidation and correction in the months ahead.
Reason for the rebound
Market Optimists
Investors see the pullback as a chance to own AI companies at more attractive prices.
AI Skeptics (Damodaran)
The recovery is driven by FOMO and investor psychology, not by improving business fundamentals.
Big tech safety
Market Optimists
The largest technology companies are best protected thanks to strong cash flows and greater access to financing.
AI Skeptics (Damodaran)
Even hyperscalers are taking on more debt to fund tens of billions in AI capex and may fail to deliver adequate returns.
- Speaker
- Aswath Damodaran, NYU professor
- Core claim
- Market passed 'peak AI' a few months ago
- Warning
- More consolidation and correction ahead; smaller AI firms face shakeout
- Roundhill Memory ETF (DRAM)
- Down 36% from recent peak
- iShares Semiconductor ETF (SOXX)
- Down 22% from recent high
- Market context
- Dow Jones Industrial Average and S&P 500 at fresh record highs
- Big tech
- 'Most protected' players, but taking on more debt for AI infrastructure
- Earlier stance (2023)
- Called Nvidia significantly overvalued