Investing.com -- Yardeni Research said in a note Wednesday that an AI bubble exists in the stock market, but its new indicator suggests it isn’t about to burst.

The firm introduced an AI Bubble Meter, which it built using Anthropic’s Claude Fable 5.1. The tool is said to have two dials.

The Conditions dial measures whether a bubble exists, drawing on the setups that preceded the 1999-2000 tech bust and the 2006-2007 housing bust. The Triggers dial tracks whether the forces that ended past booms, a credit boom and a sustained rise in the cost of capital, are underway.

“The meter says there’s a bubble, but it’s not about to burst,” Yardeni wrote.

The Conditions dial currently reads 83 out of 100. The Triggers dial reads 34. Yardeni said one trigger has kicked in, with the two-year Treasury yield up 115 basis points from its December low. However, credit is not stretched outside AI-related areas of the economy.

“The preconditions of a bubble are in place and have been for a while, but the forces that ended past booms are only partially present,” the firm said.

According to the firm, since 1965, quarters with high Conditions and low Triggers readings were followed by an S&P 500 bear market within two years only 9% of the time.

The index’s median inflation-adjusted gain over the following two years was 18.3%. The firm added that when both dials read high, the odds of a bear market rose to 42%, with a median loss of 12.5%.

“But the Triggers dial is the one to watch: If it starts rising toward High, so do the risks,” Yardeni said.

The firm will watch whether the two-year yield moves toward the 200 to 350 basis point rises that preceded the 2000 and 2006 bubbles. It will also look for signs of idle capacity in hyperscalers’ third-quarter results.

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