IS THE AI BUBBLE POPPING

There is a question on many minds today: Is the AI bubble finally starting to pop? After years of exponential hype, skyrocketing investment, and aggressive infrastructure build-outs, a growing chorus of tech leaders, economists, and market watchers are questioning whether the current AI boom is sustainable. And if it is popping, what does that mean for the stock market?

Below are a few things that have people concerned.

META Capital Expenditures

META recently announced a major increase in AI-related capital spending — and the stock market did not like the news. The stock dropped roughly 20% in response.

Many investors took this as a sign that the market is skeptical about the return on those investments.

The big AI players will invest nearly $400 billion this year alone. The good news is that these companies have the cash flow to fund it. Smaller companies and startups, however, do not have the financial strength to weather AI ROI disappointments.

ROI Concerns

A recent MIT study suggested that 95% of AI pilot programs are not yet showing measurable benefits. If business results from AI don’t materialize in a meaningful way, a major correction in the AI sector could follow.

That being said, the MIT findings don’t entirely align with many reports of AI-driven job cuts and real productivity gains. I’ve seen studies showing that software developers can increase productivity by several hundred percent when paired with an AI coding agent.  Companies are regularly announcing job cuts due to AI productivity improvements.

It is also very likely too early to fully measure the long-term business impact of AI. These systems are still in the early stages of real-world deployment.

Valuations

Valuations for many new AI companies do look aggressive. Some AI startups have annual revenues under $10 million but market valuations above $10 billion. Some will grow into those valuations — many will not. This dynamic isn’t unusual with emerging technologies.

However, the valuations of the established AI leaders are supported by strong revenue and profit growth. Microsoft, for example, trades at a price-to-earnings ratio of about 35. Given its profitability and growth trajectory, that valuation isn’t unreasonable.

The Future

As we move further into the AI era, we should expect volatility. Smaller and newer AI companies are likely to experience dramatic stock price swings. Even so, I do not expect startup failures to significantly impact the broader stock market.

If AI returns fail to materialize for the major players — the “Mag 7” — the impact will be larger, but still manageable. These companies have strong balance sheets and generate massive profits from other parts of their operations.

This is why I do not expect anything resembling the dot-com collapse of 2000–2001. Back then, tech stocks fell more than 75%. Companies were overvalued by 60% or more, and many early dot-com businesses had no profits and flawed business models.

Today, stocks appear overvalued by roughly 20%, and I do not see major credit risks forming around AI investments.

If significant AI disappointments emerge, stocks could easily fall 30%. But a 30% decline is actually a below-average bear market — declines of 25% to 30% happen regularly.

Over the past week, the stock market has fallen about 4% to 5%. It’s too early to tell whether this is the start of a major decline or simply a normal correction. Major declines don’t happen overnight; the dot-com crash unfolded over more than two years. The average bear market plays out over roughly 11 months.

Regardless of what triggers the next market downturn — AI-related or otherwise — retirement investors need a strategy that protects their savings from major losses.

My investing system is designed to do exactly that. Reach out if you’d like to immediately get the peace-of-mind that comes with a high growth investing system that limits losses in downturns.

Stay Disciplined My Friends,

Phil

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