(The opinions expressed here are those of the author, a

columnist for Reuters.)

By Jamie McGeever

ORLANDO, Florida, June 8 (Reuters) - Economic expansions

don't die of old age, and stock market rallies rarely do either.

Some catalyst is needed to burst the bubble. In the case of the

current AI boom, that may well be rising interest rates.

Economist Rudi Dornbusch famously said that ageing

expansions are killed by the Federal Reserve. Given the U.S.

equity market's sharp pullback on Friday - particularly the move

in tech - it looks like investors fear the Fed may strike again,

only this time the main victim will be Wall Street.

The Nasdaq fell more than 4% on Friday, its biggest

drop since the tariff turmoil around "Liberation Day" in April

last year. Even more strikingly, the "SOX" chipmaker index

plunged 10%, its biggest fall since the pandemic in 2020,

and the fourth-largest drop since the index was launched in

1994.

True, the SOX had nearly doubled this year, but Friday's

move was still seismic. All in all, some $2 trillion was wiped

off the value of U.S. equities, more than half of that in chip

stocks.

The selloff was notable not only for its ferocity but also

its trigger: bumper U.S. employment data. The rise in job growth

in May came in at 172,000, double consensus expectations, while

hiring in the previous two months was revised up sharply too.

Typically, this would be good news, a reflection of a strong

economy and buoyant consumer demand that should, theoretically,

boost firms' profits.

But Wall Street deemed the non-farm payrolls report to be

"bad news" because it screamed "higher interest rates." Combine

that with a market priced for perfection, and you have the

recipe for a major reversal.

RED FLAGS

Signs have been multiplying that the AI mania is getting out

of hand.

For one, there's the massive increase in AI capex forecasts,

which naturally raises questions about future returns on that

investment. Analysts at Goldman Sachs ( GS ) last week said they now

expect $5.3 trillion of capex spending in 2025-2030 from the

four largest hyperscalers, Meta, Microsoft ( MSFT ),

Amazon ( AMZN ) and Alphabet. That's up from $4.5

trillion before the first-quarter earnings season.

Then there's the eye-popping IPO blitz. The public listings

of SpaceX , Anthropic and OpenAI are expected to deliver a

combined market cap valuation just under $4 trillion.

That's a staggering figure, especially when you consider

these firms' current revenues. SpaceX's 2025 sales were less

than $20 billion, OpenAI's annualized revenue barely topped $20

billion, and Anthropic's first-quarter take this year was less

than $5 billion. These figures will undoubtedly grow, but enough

to justify these eye-watering IPO valuations?

Then there's the fear-of-missing-out or "FOMO" trade, with

stocks recording huge one-day moves almost wholly divorced from

fundamentals. Exhibit A: shares in Marvell Technology ( MRVL ),

a $100 billion company, rose 33% in one day last week after

Nvidia ( NVDA ) CEO Jensen Huang said the smaller chipmaker

would soon be a trillion-dollar company.

Bubble signs are flashing - to put it mildly.

Equity strategists at Citi last week warned that their

global "bear market checklist" was at its frothiest level since

the global financial crisis in 2008 - and getting frothier.

The checklist comprises 18 "red flags", including earnings

forecasts, fund flows, valuations, capex, investor sentiment,

and equity issuance. Currently, on a global level, 10 out of 18

red flags are flashing, with 11.5 on the U.S. checklist.

The checklist is not yet signaling the "overexuberance" that

precipitated the 2000 and 2008 bear markets, Citi notes, but the

direction of travel is worrying: "Once the count reaches double

digits, it has historically tended to rise more rapidly,

signaling a potential acceleration in risk."

WHAT STOPS THIS TRAIN?

Before Friday, it seemed like nothing would stop this equity

juggernaut. Sure, rotation within tech and across sectors has

picked up in recent months and some large tech companies had

registered big short-term share price declines. But the

benchmark indices continued to hit new high after new high.

So why might this pullback be different?

Bubbles tend not to be burst by a single trigger, but by a

range of indicators moving into more extreme territory at the

same time. Yet some triggers pack more of a punch than others.

The cost of money is one of them.

Bond yields are rising, and so too are policy rate

expectations. A quarter-point rate hike from the Fed by December

is now almost fully priced. That doesn't sound like much, but

before the Iran war, traders were expecting nearly three cuts.

Add an increasingly solid labor market to the U.S. economy's

high inflation and loose financial conditions, and the cost of

money seems set to rise.

If so, history suggests economic growth is at risk. So is

the runaway stock market.

(The opinions expressed here are those of the author, a

columnist for Reuters)

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(By Jamie McGeever

Editing by Marguerita Choy)