Tag: Finance

Is There An AI Bubble: A Structural Analysis

February 7, 2026by Awareness NewsLeave a comment

As we conclude 2025, the debate around the “AI bubble” has clearly shifted from a mere discussion of technological potential to a worried interrogation of financial sustainability. After three years of persistent AI investments following ChatGPT’s launch, the sector is now going through slowing growth expectations, skyrocketed capital costs, and doubts around future profitability.

Whether to the upside or downside, AI currently is and will be the main driver of the returns in the public equity market. But to allocate capital in the market, investors must feel confident that what is going on is not indeed a bubble burst.

What Defines a Bubble

A financial bubble happens when asset prices are substantially higher than their fundamental values. Investors go long (buy) when they believe an asset is undervalued, meaning it is priced under its fair price. But as prices keep rising, investors’ motivation changes, with the focus shifting from how much the asset is valued towards how much higher it can still go.

To determine whether the current AI cycle represents a true financial bubble, we can evaluate it against the phases defined by Charles Kindleberger and Hynan Minsky.

Displacement

Everything starts from an innovation that fundamentally changes the perceived profit opportunities in a major sector. The launch of ChatGPT in late 2022 acted as the catalyst triggering a regime where technology was not simply considered a tool anymore, but rather a “New Era” of boundless productivity.

Over the last 5 years, NASDAQ-100 has delivered a total return of approximately 120.6%, representing a compound annual growth rate of 17.1%. An initial growth was driven by the post-pandemic digital shift, but the true catalyst was indeed the launch of ChatGPT.

Boom and Euphoria

Stability in this phase is officially destabilized. The sustained performance of AI leaders has been increasingly convincing lenders and regulators that the system was safe, leading to a weakening of credit discipline.

By 2025, the most profitable four technology companies at the global level are borrowing at rates that we haven’t seen so far since the telecom bubble to build infrastructure for demand that potentially may never arrive.

Only in 2025, Amazon, Google, Microsoft, and Meta invested over $400 billion on AI infrastructure, with current expectations according to Man Group of even $3 trillion over the next five years. Bain & Company estimated that to justify such CAPEX, such companies should generate $2 trillion in new AI revenue by 2030, literally a 100x increase from the current $20 billion baseline.

For example, since 2022, US investment has shifted away from typical office construction towards data centres, reflecting the rapid expansion in AI-driven infrastructure.

*US spending: Office construction vs. Data centre infrastructure*

One of the biggest concerns about this is the change in strategy it deep down represents. The value of Big Tech was typically based on the ability to generate quick revenue growth at low costs, resulting in great free cash flows. However, their AI choices have now turned this model upside down.

This level of investment is extraordinary. At its peak, the 5G telecom buildout deployed about 70% of operating cash flows. AI infrastructure is going in the same direction. Hyperscalers are trying to power their own workloads, while AI developers are trying to train large language models (LLMs). Hence, big tech stocks have risen, but if computing supply is limited by insufficient power, then the AI bubble could deflate.

This bubble is indeed concentrated in such Magnificent Seven, which drive much of the S&P 500’s daily price moves. If their valuations fall, several portfolios will take a hint, even for people who think they are merely passively saving for retirement.

Panic

Analysts are keeping under control the Minsky Moment, that is the point where the system turns into a Ponzi scheme. A Ponzi scheme can be thought of as a scam scheme that promises a high return with little risk to new investors, relying on the word-of-mouth spreading about the big returns earned by early investors. Ultimately, if the flow of new investments slows down, it becomes impossible to pay out those supposed profits. That is when the Ponzi scheme collapses.

At this stage, borrowers cannot afford the repayment of their debt from current operations and must completely rely on rising asset prices to meet their obligations.

If we look at the 2025 AI cycle, signs of a Minsky Moment include:

Accounting Illusions: The systemic extension of GPU depreciation schedules from 3-4 years to 6 years, which potentially masks a $176 billion earnings impairment “time bomb”.

Credit Signals: Rising costs in Credit Default Swaps (CDS) for firms like Oracle (which hit a record 1.26% spread) suggest that lenders are beginning to reassess the risk of CapEx-heavy balance sheets.

The Funding Gap: A projected $1.5 trillion shortfall in the capital needed for data center buildouts between 2025 and 2028, forcing a dangerous reliance on private credit and high-yield debt to keep the cycle alive.

This suggests that a “Panic” or “Profit-taking” phase could be triggered once a critical mass of investors realises that the forecasted 100x revenue growth will not materialise within the 2-3 year lifespan of the current hardware.

Nvidia As Barometer

Many look at Nvidia as the current market’s most reliable signal for whether the AI boom is grounded on reality or a fable of excess. We are talking about the main supplier of chips powering LLMs and data centres, hence its revenues are said to reflect actual AI spending. In other words, it is the heart of the AI infrastructure.

The stock has indeed become a proxy for the health of the overall AI ecosystem. When Nvidia’s stock price surges, it supports the confidence that AI is a productive investment, but when it falls, it creates doubts about whether capital is invested faster than what revenues justify.

No other company has benefited from AI spending than Nvidia. The stock, indeed, has surged alongside unprecedented GPU orders from cloud providers.

Key here is the chosen depreciation policy. Tech giants have lengthened their server lifespans on the books to six years. However, Nvidia’s products are made to be changed every year, making older chips obsolete and less energy-efficient.

For Nvidia, the next steps will rely on execution rather than hype. Markets are already watching closely to see whether hyperscalers will keep their capex as depreciation costs increase, whether demand will expand beyond a few dominant players, and whether AI revenue growth can cover the scale of infrastructure investments.

*Big Tech Depreciation expenses growth.*

In particular, rising depreciation costs are pressuring buybacks and dividends, that is return for stockholders. In 2026, major actors as Meta and Microsoft are even expected to have negative free cash flows after accounting for shareholder returns.

If Nvidia will maintain a positive performance against those questions, it may actually fade bubble fears. Otherwise, its share price will reflect a market that changes expectations.

Conclusion

If on one hand fears of an upcoming bubble may be premature, the era of unquestioned enthusiasm is fading away in front of our eyes. Most analysts are not expecting a dramatic collapse as with the dot-com bust. Nowadays AI leaders are far bigger, more profitable, and better capitalised than their late ‘90s counterparts. According to experts, what might actually happen, instead, is a change within the AI trade, with investors favouring companies that have clear cash flow generations and scalability, against historically expensively valued names relying on flawless execution.

Sources:

Financial Times; Investopedia; Yahoo Finance; Bloomberg; Bain & Company; Business Insider; BBC; CNBC.

Rebecca Fratello

Writer

Risk Repriced: How Political Instability Reshapes Market Confidence and Sovereign Costs

October 28, 2025by Awareness NewsLeave a comment

Reading time: 8 minutes

When Markets Look At Politics

We are used to thinking of financial markets as driven only by economic principles such as inflation, interest rate expectations, and growth forecasts. In this context, politics is background noise: unpredictable, difficult to quantify, and irrelevant to asset pricing. Yet this perception increasingly misrepresents reality.

Political developments have become central to how markets interpret risk, reprice assets, and allocate capital.

Nowadays, headlines from governments regularly trigger revaluations. Political uncertainty is growingly emerging as a source of volatility and a key determinant of sovereign borrowing costs. Every new cabinet announcement, legislative halt or budget negotiation is a signal investors have to price, quickly and with little margin for error.

The uncertainty about future government actions may have a dual effect on market prices. In rare cases, it may represent policy flexibility against shocks. But in the majority of cases, it may actually reflect growing doubts about institutional resilience and future fiscal tracks.

The market impact is clear: as stock prices respond to political news, political uncertainty leads to higher equity risk premium, increased asset correlation and consequently lower diversification benefits.

To better understand how political turmoil can flow into financial markets, we can have a look at the most recent case: France.

The French Distress

In October 2025, France dived into a serious political turbulence after the resignation of Prime Minister Sébastien Lecornu just one day after announcing his cabinet. It’s the collapse of the fifth prime minister in just two years, a statistic that points out not just instability but a deeper fracture in the French political system.

Public surveys reveal despair, pessimism and distrust as the prevailing feelings in French citizens. Worrying symptoms representing the profound current democratic crisis, not even two years ahead of the next presidential election.

Financial markets, never known for patience but for how quickly they react, are clearly reflecting investors’ sentiment. Not surprisingly, French equity indices dropped, and bond markets did not do differently. For instance, yields on the 10-year French government bonds skyrocketed by 7-8 basis points, reaching around 3.58%. The spread between French and German bond yields broadens as investors demand a premium for holding what they see as riskier sovereign debt.

*Figure 1: The yield gap widened sharply amid French political turmoil, reflecting rising investor risk premia on French debt.*
*Source: LSEG via Reuters.*

The reason for this reaction? The answer is not that straightforward. No single event triggers the repricing by itself, but the clear loss of confidence in France’s fiscal policies plays an unequivocal role. The situation in France is getting complicated, both politically and economically.

The general feeling speaks loud: France looks unable to find its way out of this malaise.

Shifting Benchmarks

Historically, France was perceived as relatively safe within the Euro area bond markets. Italian bonds, instead, have been telling a different story so far. Yet, trends are changing.

Figure 2: French (red) and Italian (green) 10-year government bond yields nearly converged in late 2025, reflecting France’s political turmoil (rising yields) versus relative stability in Italy (falling yields). Source: LSEG via Reuters.

As French borrowing costs have risen, Italian yields have followed the opposite direction. This shows how perceptions around France, once considered a core market, and Italy, long seen as one of the weakest ones instead, have radically changed. Investors are concerned that France will not be able to improve its fiscal position due to its political instability, thus pushing up its bond yields. Different story for Italy, where relative political stability and downward debt forecast have caused its bond yields to decrease.

But be careful. For some, the narrowing of the French-Italian bond spread has more to do with French fiscal and political distress than an improvement in Italy’s market.

Italy has been afflicted by chronic problems that will take a long time to fix. We are still talking about the euro zone’s second-largest debt as a percentage of GDP after Greece, with a growth of the economy being obstructed by a concerning falling population and low female employment.

Still, the convergence of French and Italian bond yields serves as a striking illustration of the implications of political stability and credible budgeting on investors’ confidence.

Indeed, global investors nowadays look at governance quality in advanced economies pretty much as economic principles to adjust their required returns.

Impact On Growth And Market Confidence

Beyond market volatility, political instability carries important long-term economic costs. Empirical research on advanced economies has demonstrated that an uncertain politics can cause delayed investment decisions, hard policy execution, and undermined growth prospects. In fewer words, high levels of political instability can overall cause worse economic output.

The reasons are pretty intuitive: when governments are fragile or policy direction is unclear, businesses and consumers lose confidence. Private sectors struggle to create expectations, while public institutions turn less effective in providing structural reforms.

But as fragmented governments are not able to enact reform, public finances deteriorate. In France, the continuous change in leadership has paralysed the adoption of a new fiscal regime, delaying important decisions on expenditure and taxation. This creates a dangerous loop: as fiscal negligence decreases investor confidence, sovereign borrowing costs increase, which displace public spending, which in turn further constrains the ability to enact future reforms.

France, for instance, has gone through five prime ministers in just two years, its national debt exceeding €3 trillion, and it seems unable to create a credible path towards fiscal balance.

*Figure 3: France holds the third-highest debt burden in the EU, after Greece and Italy, exceeding 110% of GDP.*
*Source: Eurostat.*

Globally, the political instability of an advanced economy as France can have both negative and positive spillover effects on other regions as well. On one hand, investors may require higher risk premiums also from other countries perceived as politically vulnerable. On the other hand, such instability may cause a flight-to-quality flows, as capital would flow towards safer bonds such as Germany Bunds or U.S. Treasuries.

However, the coincident fiscal crises in multiple large economies, might result in a broader reallocation of global capital away from equities and emerging markets, thus potentially threatening global growth.

Institutions such as the IMF and OECD have pointed out how political stability and consistent fiscal policies are not only priorities at the domestic level, but also the foundations of international market confidence and macroeconomic resilience.

Conclusion

What France is going through right now is not just a domestic drama. We are using this case as an understanding of what can be the costs of institutional fragility in a period of high debt and fiscal uncertainty. When governments and their reforms falter, consequences can be urgent: higher borrowing costs, downgraded credit ratings, eroded currencies, and constrained growth.

If investors would once see political risk as background noise, now they price it in their models and we need to discuss it. The bond market has become a criterion of credibility, which rewards discipline and punishes obstructions.

The message to policymakers is clear: good governance is capital. Stability, transparency, and consistency are no more mere abstract democratic values, but economic assets bringing yield. We are still in a post-pandemic context with high interest rates and insecurities, and policy incoherence is no longer tolerated.

Preserving market trust is vital. Governments must now handle both budgets and expectations. Credibility can be the cheapest form of stimulus for those countries facing high debt and structural change. And as France is showing, once lost, it becomes the most expensive asset to restore.

Sources: Reuters; Euronews; Financial Times; Fitch Ratings; Eurostat; LSEG via Reuters; IMF; OECD; ECB; Political Uncertainty and Risk Premia, by Lubos Pastor & Pietro Veronesi; European Journal of Political Economy; Political Instability and Economic Growth: Causation and Transmission, by Maximilian W. Dirks & Torsten Schmidt.

Rebecca Fratello

Writer

The Interesting System of a Islamic Finance

December 3, 2019February 5, 2021by Awareness News2 Comments

“Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, “Trade is [just] like interest.” But Allah has permitted trade and has forbidden interest. So, whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah. But whoever returns to [dealing in interest or usury] – those are the companions of the Fire; they will abide eternally therein.”

— Qur’an – Surah Al-Baqarah [2:275]

““O you who have believed, fear Allah and give up what remains [due to you] of interest, if you should be believers.”
And if you do not, then be informed of a war [against you] from Allah and His Messenger. But if you repent, you may have your principal – [thus] you do no wrong, nor are you wronged.
”

— Qur’an – Surah Al-Baqarah [2:278-279]

If you wish to hear the recitation of the verses, links are provided here: 2:275; 2:278; 2:279

These three quite ominous verses sum up, succinctly and clearly, what grim fate Allah has planned for those who deal in interest. However, it might be more accurate to say riba (ربا), rather than interest. Indeed, it could be argued that translations of the verses above which keep riba untranslated are more accurate. (Truthfully, any version of the Qur’an in English could be classified as unduly westernized.) This Arabic word’s original meaning is something along the lines of “increase”, “excess” or “addition” but is now primarily used to refer to the practice of interest or usury.

Some defend that riba doesn’t apply to all interest but, rather, only to unusually high interest-rates: usury. There is a lot of Islamic literature which equates riba with interest and that claims that there is a consensus amongst Muslim scholars that this is so.

There are many justifications given by religious scholars for the banning of interest by Allah, namely claiming that lending with interest is exploitative and that the lender/borrower relationship created undermines the spirit of brotherhood that should exist amongst Men. This religious ideal is not unique to Islam. Indeed, other Abrahamic religions have things to say about interest:

“Do not charge interest on the loans you make to a fellow Israelite, whether you loan money, or food, or anything else.”

Holy Bible – Deuteronomy [23:19]

Human beings’ innate fear of falling in eternally burning fires and our puzzling love for masochistic submission to an almighty father figure came together in the Muslim world to create a Sharia-compliant banking system commonly referred to as Islamic Banking. In broad terms, to be in accordance with Allah, Islamic banks must not receive nor pay interest and must not invest in or involve themselves with businesses which partake in haram (forbidden) activities, such as selling alcohol, pork, gambling, etc.

Now, the question lingering in everyone’s minds: “How do these institutions function?”

In Islamic Banking, the most common way of financing is what is called Murabaha. It is, essentially, a contract of sale in which the bank buys a good that its client needs and then sells it to him with a previously agreed upon mark-up cost. Say, for instance, that you need a new set of tables for your restaurant. The bank buys said set of tables from the table-maker at X€ and sells them to you at X+P€, an amount that you pay through deferred payments.

I don’t need a revelation from Allah to know that many of my esteemed readers are scratching their heads in utter confusion trying their hardest to understand how such a transaction amounts to anything different than paying interest on a loan. Is it just interest with extra steps? Indeed, this is a criticism which Murabaha-type financing receives in ample amount, implying, therefore, that it is not Shariah compliant. However, since this removes the much-frowned-upon aspect of “money generating money on its own” and involves specific commodities, supposedly, Allah is pleased. And so, in spite of its criticisms, Murabaha contracts are calculated to represent about 80% of total financing made by Islamic Banks.

Another type of financing contract that exists in Islamic finance is called Mudarabah which, contrary to Murabaha agreements, is broadly accepted as Shariah compliant. This method, which closely resembles venture capital financing, is a type of contract in which an agent provides the capital (called the rabb-ul mal (رب المال), literally “lord of money) to another agent, who invests it and operates the investment (called the mudarib). The mudarib has complete authority in operating and managing the investment. Profit after the repayment of the borrowed capital, when it exists, is split amongst both parties in a previously agreed-upon manner. On the other hand, if the project fails, the losses fall entirely on the rabb-ul mal, who will lose his invested capital.

Due to the very high risk that the rabb-ul mal faces, Mudarabah contracts contain covenants which protect him from negligence by the mudarib. However, the viability of this method of financing still suffers heavily from structural agency problems: the mudarib does not suffer from losses nearly as much as the rabb-ul mal. For the financier to be willing to take projects with higher risk, he will demand a higher profit share. However, this, in turn, diminishes the incentives that the borrower has to generate profits. And so, mechanisms that better align the incentives of both parties, like the ones used to align the incentives of shareholders and managers (for example shareholders voting to elect a Board of Directors), need to be incorporated to actually make this a practical way of financing.

A similar type of contract exists, called Musharakah, but where two or more parties pool capital for an investment and divide profits according to it.

There is a hadith in which prophet Muhammad says:

A dirham of riba which a man receives knowingly is worse than committing adultery thirty-six times.

Assuming that this is true, and that people, in general, don’t like adultery, then, it is no surprise that Islamic Finance continues to grow, with global assets exceeding $2000bn. However, its growth is not restricted to Muslim-majority countries. Many financial companies, like J.P.Morgan, now offer Sharia-compliant financial services and the United Kingdom is at the forefront of this industry’s growth in the west. With about 5% of its population being Muslim there are already 5 different, completely Islamic, banks operating in the U.K.

This is a topic whose surface I was only able to scratch in this article due to its surprising complexity. But, surely, its relevance will only increase as Islamic Finance evolves and migrates from the Muslim-majority countries to the rest of the world.