Grey swans in finance: are AI valuations today a “grey swan” event?
Grey swan events occupy a unique position in risk analysis: unlike black swans (unknown unknowns), grey swans are rare but identifiable.
Have you heard about Grey Swan? No, I am not talking about the infamous "Black Swan" that Nassim Taleb talked about. I am talking about Grey Swan.
Grey swan events occupy a unique position in risk analysis (sometimes, I call it, the bread and butter of risk analysis): unlike black swans (unknown unknowns), grey swans are rare but identifiable; think of them as highly improbable, yet conceivable, disruptions.
As investors increasingly scrutinize the AI sector’s sky-high valuations, the question arises: is present-day AI pricing a classic grey swan, poised to surprise markets despite being recognizable?
Understanding grey swans
Taleb’s original “Black Swan” describes outlier events that are unpredictable and have massive impact. Grey swans differ. How? Simply analysts can detect Grey swans, but assign them low probability. In context, a grey swan in financial markets would be a risk many see but few believe will materialize. In other laymen terms: Risk in plain sight, so eyes don't or ignore to detect it.
AI market valuations today: numbers don’t lie
Consider these striking facts:
- Public AI stocks have outperformed:
- Revenue Multiples at Extremes:
- Earnings Growth and Discount Rates:
- Venture and Crossover Appetite:
Is AI the next grey swan?
Let’s examine why AI valuation could be a “grey swan” risk:
- Patterns repeat: Historic bubbles saw extreme multiples, high sector concentration, and optimism about “step-change” technology; parallels to today are stark.
- Leading indicators (options volumes, retail flows, private deal pricing) are elevated but not yet panic-level.
- Many allocators acknowledge the possibility of reversion/growth disappointment, but few are moving underweight, citing “too much FOMO” and the risk of missing out if euphoria persists.
Time series: are we in a grey swan ascent?
- 2000–2001: Tech led S&P drawdown by 6 months; multiples collapsed ahead of earnings misses.
- 2007–2008: Financial sector overvaluation unwound, triggering broader crash.
- 2023–2025: AI multiples have expanded on a similar timeline, but underlying profitability and cash flows remain a fraction of sector valuation.
Overlaying AI-centric indices vs. S&P 500 since 2020 shows AI outperformance at a near-exponential rate, especially since GPT-4 deployment (mid-2023):
- AI index CAGR (2020–2025): 42%
- S&P 500 CAGR: 12%
Conclusion: grey swan or rational exuberance?
While AI’s potential justifies premium pricing, the gap between current pricing and underlying cash flows, or even plausible near-term growth, is reminiscent of prior grey swan events. The market sees the risk, but few price for it. That’s the definition of a grey swan: foreseeable, yet not fully believed.
Investors should stress-test portfolios for the scenario where “AI doesn’t change everything, at least not as fast, or profitably, as prices imply.” History shows these moments aren’t as rare as we think.
But as I always tell myself, markets can prove that you are "fool" when you have all the risk flags popping up. However, as an investor, always remember Ray Dalio's comment on grey swan:
“The biggest risk is believing that last year’s returns are tomorrow’s reality. If everyone’s betting on one trend, grey swan risks grow in the shadows.”
Take care and Happy investing.
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Eighteen years in investment management, M&A and financial technology. A CFA Charterholder, he leads investment analysis, valuation and fund structuring across Significa's advisory and investment practices, and teaches valuation and fund structures in the CVC Builder curriculum. Concurrently Chief M&A and Growth Officer at AlternativeSoft in London; co-founder of MarkeScope, which developed the first stock-screening solution to incorporate risk measures. Treasurer of CFA Society Egypt; BSc Electrical, Electronics and Communications Engineering, Cairo University.