(MENAFN- The Arabian Post)

Every bull market has its blind spots. There comes a point in every economic cycle when optimism feels effortless, when valuations stretch, and when extraordinary developments start to look normal. Only later, with the benefit of hindsight, do we realise which signals were genuine warnings.

Today, investors are once again wrestling with that question. Global equities are trading near record highs, liquidity is returning as US interest rates fall, and the transformative potential of artificial intelligence is driving a powerful rally in risk assets.

The enthusiasm feels well-founded, as AI is clearly real and lower borrowing costs support risk-taking. Yet there are reasons to pause and ask whether we're seeing rational conviction or the first signs of speculative excess.

Four recent developments in particular reveal this tension between progress and peril.

Overinvestment in AI

No other trend has attracted capital on such a vast scale as artificial intelligence. America's largest technology firms, the so-called“Magnificent Seven,” collectively spent around $112 billion on capital projects in just one quarter, the majority linked to AI infrastructure and data processing capacity. The sums are unprecedented.

Still, unlike the debt-fuelled spending binges that preceded previous market crashes, these investments are largely funded from corporate cash flows. Tech giants are sitting on immense balance sheets and can absorb setbacks without threatening their stability.

If AI delivers anywhere near its expected gains in productivity, logistics and automation, the spending could prove entirely rational.

The more fragile side of the story lies in the smaller companies and start-ups borrowing heavily to chase the same dream. Many of these firms are turning to non-bank lenders to raise expensive capital, a setup that leaves them exposed if the market mood turns. It's here, in the shadows of the system, that misallocated investment could become problematic.

Valuations at the Limit

Take the example of Palantir, the AI-oriented software and security group. Even after a double-digit decline in its share price last week, the company still trades at around 200 times expected earnings.

See also ASML's breakout shows where the next trillion in AI investment could be heading

For perspective, the broader US equity market sits closer to 23 times, itself already elevated above its 20-year average of roughly 16.

Numbers like these make many investors uneasy. But expensive does not necessarily mean irrational. Great growth companies often look overpriced in the moment. Investors once said the same of Amazon and Microsoft. Those who took the long view were rewarded.

High valuations become dangerous only when they lose their connection to potential earnings growth. If AI truly transforms efficiency and profitability across industries, current multiples may hold up. If expectations prove inflated, the correction will be swift. For now, we are in the zone where optimism and overconfidence are indistinguishable.

Executive Rewards on a Grand Scale

Few figures capture today's exuberant spirit more clearly than Elon Musk's immense compensation plan at Tesla, a potential $1 trillion payout if demanding performance goals are met.

To critics, it's a symbol of a market drunk on success and a reflection of an era when corporate pay can appear detached from restraint.

Yet in this case, the terms are heavily conditional. The reward is tied to market capitalisation and operational milestones that would require extraordinary execution. Should Musk meet them, shareholders would have benefited far beyond the cost of the bonus. It's excessive, yes, but not necessarily evidence of corporate excess gone wild.

Still, it's a reminder that every bull market breeds its icons of ambition, and that such headlines often coincide with the later stages of the cycle.

Credit Risk: Rational or Reckless?

Another sign that has raised eyebrows came quietly out of China. The government issued three- and five-year dollar-denominated bonds at the same yields as equivalent US Treasuries. On paper, that means investors see China as equally creditworthy as the United States, despite the fact that the US, as the issuer of dollars, can always create the money it needs to repay its debt.

See also Is tech overpriced or is it the only thing growing?

This is remarkable. It suggests global investors are beginning to weigh fiscal discipline and policy stability more heavily than monetary sovereignty. Given the chaotic fiscal management and ballooning deficits under President Trump's administration, some see China's balance sheet as the steadier option.

The logic may not be wrong, but it underscores how perceptions of“risk-free” assets are changing.

Bubble or Breakthrough?

So, are these signs of excess or simply evidence of a new phase of growth? The answer is almost always clear only in retrospect. Every cycle has elements of both exuberance and genuine progress, and it's rarely possible to separate them in real time.

What history does teach us, however, is that trying to pinpoint the exact peak of a market is usually a mistake. Investors who attempt to time the top often sell too late, after momentum has already reversed, and then re-enter only once the strongest phase of the recovery has passed. The result is missed opportunity, not protection.

A more effective approach is to remain invested, but to do so intelligently. That means adhering to a disciplined investment strategy designed to cushion the blow if markets do correct. Diversification remains the most reliable defence, as does managing exposure to the most inflated sectors that tend to fall hardest when optimism fades.

Bubbles only reveal themselves with hindsight. The wiser course is to stay invested but prepared. Participating in growth while setting clear limits on risk is how investors endure volatility and preserve long-term gains.

In every era of innovation, those who combine discipline with conviction are the ones who prosper.

Nigel Green is deVere CEO and Founder

Also published on Medium.

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