As the artificial intelligence trade continues to push the stock market to new highs, investors are increasingly asking if we’re living through another financial bubble that’s destined to burst.
The answer isn’t so simple, at least according to history.
Throughout history, over-investment has been a common theme when there’s a technological advancement that will transform society, according to Invesco chief global market strategist Brian Levitt, who pointed to the development of railroads, electricity and the internet. This time may be no different.
“At some point the infrastructure build may exceed what the economy will need over a short period of time,” he said. “But that doesn’t mean that the rail tracks weren’t finished or the internet didn’t become a thing, right?”
Still, with equity valuations creeping up and the S&P 500 just posting its third straight year of double-digit percentage gains, it makes sense that investors are growing concerned about how much upside is left and how much market value could be lost if AI doesn’t live up to the hype. Nvidia, Microsoft, Alphabet, Amazon.com, Broadcom and Meta Platforms account for almost 30% of the S&P 500, so an AI selloff would hit the index hard.
“A bubble likely crashes on a bear market,” said Gene Goldman, chief investment officer at Cetera Financial Group, who doesn’t believe AI stocks are in a bubble. “We just don’t see a bear market anytime soon.”
Here’s how today’s AI boom stacks up against previous market bubbles.
While it’s difficult to draw any conclusions from the data, Hartnett warns investors against fleeing the stock market even if they believe it’s in a bubble because the last stretch of the rally is typically the steepest, and missing out would be costly. One way to hedge is to buy cheap value plays like UK stocks and energy companies, he said.
Market historians argue that, while the concentration seems extreme relative to recent memory, there are precedents. Top stocks as a share of the US market were at similar levels in the 1930s and 1960s, according to London Business School professor Paul Marsh, who studied the past 125 years of global asset returns. In 1900, 63% of US market value was tied to railroad stocks, compared with 37% tied to technology at the end of 2024, Marsh said.
Asset bubbles tend to be much harder to spot in real time than after the fact because fundamentals are usually at the center of the debate, and the metrics investors focus on can be fluid, according to TS Lombard economist Dario Perkins.
“It is easy for tech enthusiasts to claim that ‘it’s different now’ and that fundamental valuations will never be the same again,” he said.
But some fundamentals are always important. For example, compared with the dot-com bubble, today’s AI giants have lower debt-to-earnings ratios than, say, WorldCom Inc. And companies like Nvidia and Meta Platforms are already reporting strong profit growth from AI, which wasn’t necessarily the case in the speculative era 25 years ago.
The S&P 500’s valuation is the highest it’s ever been except for the early 2000s, at least according to its cyclically adjusted price-to-earnings ratio, a metric invented by economist Robert Shiller that divides a stock price by the average of its inflation-adjusted earnings over the past 10 years.
Stock prices decouple from earnings growth in an environment where there’s no debate on valuations, according to Richard Clode, a fund manager at Janus Henderson. “We’re just not seeing that currently as yet,” he said.
Investors see an AI bubble as the biggest “tail risk” event, a December poll by Bank of America showed. More than half of the respondents said the Magnificent Seven tech stocks were Wall Street’s most crowded trade.
“I wouldn’t brush it off, but I would generally think that scrutiny is healthy,” he said. “In fact, that scrutiny is what will prevent extreme moves like a crash.”
