Howard Marks, co-chairman of Oaktree Capital Management, just did something unusual: he called the AI boom a bubble, then immediately told investors not to run away from it. In a memo released Tuesday titled "Is it a Bubble?", Marks walks a tightrope between enthusiasm and caution that's worth paying attention to.

Yes, It's A Bubble—But Not The Bad Kind

Marks uses the term "irrational exuberance" to describe current AI market sentiment, but he's not lumping this in with your garden-variety financial manias. Instead, he calls it an "inflection bubble"—similar to the railroad boom or the internet craze. The distinction matters.

According to Marks, the capital being burned today is essentially "carpet-bombing" the future with infrastructure that will eventually prove essential. Sure, most early investors will get wiped out, and yes, people are overpaying. But the technology itself will likely reshape everything.

"The excesses accelerate the adoption of the technology in a way that wouldn't occur in their absence," Marks writes. "The key is to not be one of the investors whose wealth is destroyed in the process of bringing on progress."

In other words: somebody's going to fund the future, and it might as well not be you losing your shirt in the process.

The Debt Problem In A Winner-Take-All Game

Here's where Marks gets really worried: the shift from equity-funded innovation to aggressive debt financing. He points to "circular deals" and off-balance-sheet Special Purpose Vehicles as warning signs that things are overheating.

The math of debt investing in AI is particularly brutal because this is likely a winner-take-all competition. If you're an equity investor holding a basket of AI stocks, one massive winner can cover all your losers. But debt doesn't work that way.

"The precise opposite is true of a diversified pool of debt exposures," Marks writes. "You'll only make your coupon on the winner, and that will be grossly insufficient to compensate for the impairments you'll experience on the debt of the losers."

Think about it: the winning AI company pays you back with interest—maybe you make 8%. Meanwhile, three other companies in your portfolio go bust, and you lose everything on those positions. The coupon from the winner doesn't come close to making you whole.

The Middle Path Forward

Despite all the warnings, Marks isn't telling anyone to sit this out entirely. AI's transformative potential is too significant to ignore. His prescription? A "moderate position" that balances fear of missing out against fear of losing everything.

"No one should go all-in without acknowledging that they face the risk of ruin," Marks cautions. "But by the same token, no one should stay all-out and risk missing out on one of the great technological steps forward."

It's rare to hear such measured advice in a market environment that tends to reward extreme positions, but Marks has built his reputation on exactly this kind of nuanced thinking.

Market Context

The broader market continues its strong 2025 performance. The S&P 500 index has advanced 16.56% year-to-date, while the Dow Jones index returned 12.19% and the Nasdaq Composite gained 22.28% in the same period.

The SPDR S&P 500 ETF Trust (SPY) and Invesco QQQ Trust ETF (QQQ), which track the S&P 500 index and Nasdaq 100 index respectively, were higher in premarket trading on Wednesday. SPY was up 0.066% at $683.49, while QQQ advanced 0.042% to $625.31.