♪ Pop-pop-pop goes the AI bubble – and it is in trouble ♪. Highlighted by last week’s announcement that the company Cursor, a start-up that makes AI coding tools, raised $2.3 billion; that private-market capital infusion implied that the company’s market capitalization is valued at over $29 billion, or 12 times the value of the company that it had in January of 2025.i Yes, 12 times! The $29 billion valuation is for a
start-up company that has an estimated 300 employees; back-of-the-envelope valuation per employee is measured at about $97 million/person. By comparison, the employees of Microsoft, the world’s leading
software company and arguably the most important company in the United States, are valued at $16
million/person, or 1/6th the value of Cursor’s employees. Comparing Cursor’s valuation per employee to
Petrobras’, the Brazilian premier market leading integrated oil and gas company with an estimated 90%
market share in crude oil output in Brazil, Cursor’s stock market employee valuation is over 50 times that
of Petrobras’ employees. AI-related investment valuations are clearly stretched, given some of AI’s long
term fundamental challenges (please refer to Hemisphere’s post on Data-Center Investment Risk
published on October 23, 2025 Data Center Investment Risk: Lessons from the Past).
REAL Fed funds Rate
On the graph above, Hemispheres has plotted a historical price-line of the REAL fed funds rate – the fed funds rate minus the trailing 12-month inflation rate. The current rate is just above 1% and can be described as a moderately tight monetary policy, based upon the last 27 years of economic history. The REAL rate was much lower during the asset-backed securities, internet and the Covid-19 crises. The current fed funds rate gives the Federal Reserve plenty of flexibility to support a weakening U.S. economy with interest rate reductions, should the AI bubble deflate and cause significant problems for the economy.
Michael Hart CFA
CEO and Portfolio Manager
Rebecca Holden CFA
Director of Domestic Research and Portfolio Manager
iThe Wall Street Journal, page B1, November 14, 2025
November 20, 2025