Recently, there has been a significant increase in investment in the field of artificial intelligence (AI). Analysts have compared this trend to the early days of the internet “dot com” era and the subsequent market crash.
For Wall Street, this feels like a familiar moment: a revolutionary technology sparking imagination, capital flooding in, and investment valuations beginning to hold overly high expectations for the future.
As expenditures in the AI sector accelerate, the industry’s profits are effectively dominated by a few giant tech companies. Insiders in the financial industry are starting to question whether the prosperity of AI has crossed a boundary and entered into a market bubble – where asset prices exceed their actual value.
Among the industries benefiting the most (and potentially facing the largest losses) in the AI sector, profits have reached historic highs. Among the top five companies by market capitalization in the S&P 500 index, all are tech giants investing heavily in AI. Furthermore, data from FactSet, a financial data software company based in Connecticut, shows that in the fourth quarter of 2024, 241 companies in the S&P 500 listed AI as part of their profits, marking a record high in the past decade.
Investment experts point out a potential issue: how much of the disclosed profits actually stem from AI, and how much is tied to other sources of income?
“The narratives around the future prospects of AI are currently driving up stock prices. However, when these stories result in disappointing earnings performances, stock prices will fall,” revealed Paul Walker, owner and writer of Fil Financial Corporation.
“Most investors are not aware of how concentrated the market has become. Recent gains of around 60% or more in the S&P 500 and Russell 1000 indices are largely driven by the so-called ‘magnificent seven’ tech giants,” he added.
In other words, investors’ portfolios may not be as diversified as they think. When these stocks fluctuate, panic can quickly spread as investors sell off index funds heavily invested in the same tech giants.
The “magnificent seven” refers to Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla – seven major tech companies.
Some analysts believe that the AI bubble will continue to inflate in 2026. Jonas Goltermann, an analyst at Capital Economics, a global macroeconomic research firm based in London, pointed out that the AI ecosystem currently exhibits many characteristics of a bubble, including exaggerated beliefs in the potential of AI among industry insiders and investors.
A recent analysis by J.P. Morgan in New York noted that most market bubbles follow a certain pattern, often starting with an “investment narrative” that the world is undergoing a groundbreaking transformation.
According to a report by GIS based in Liechtenstein, despite Oracle’s lower-than-expected earnings, its stock surged by 36% in September. Oracle announced that by 2030, AI-driven cloud revenue is expected to reach $144 billion, boosting its stock significantly.
In the late 1990s, speculation and massive investments in internet startups (the “dot-com bubble”) drove the NASDAQ Composite Index from 751 points in January 1995 to over 5,048 points in March 2000. However, many companies failed to deliver on their promises, causing the market to crash over 75% between March 2000 and October 2002, evaporating over $5 trillion in market value.
Sam Altman, CEO of OpenAI in San Francisco, expressed concerns in an interview with The Verge in August, questioning whether investors are currently overly excited about AI as a whole.
Dan Buckley, chief analyst at DayTrading.com in the US, believes the current situation “feels more like 1998 than 1999,” suggesting that true bubbles typically form after a technology has proven its importance and attracts a majority of investors.
Artificial intelligence has already “crossed that line,” making the current market stage more risky, according to Buckley. Pricing might become looser, with monetary and fiscal policies more supportive of AI infrastructure. Governments are also getting involved, viewing AI as a source of geopolitical power rather than focused solely on economic returns.
Businesses are heavily investing in the future of AI, with colossal amounts of money being poured into the field. A report published by Goldman Sachs in New York on December 18 revealed that in just the third quarter of 2025, large “hyperscaler” tech companies invested $106 billion.
JDP Global estimates that major tech companies have already spent a total of $364 billion in the AI sector this year.
Goldman Sachs observed that investors are becoming increasingly cautious in selecting which companies to invest their funds in when it comes to AI.
Investors are more inclined to choose companies that can clearly demonstrate a connection between their AI spending and income, according to the report.
Pedro Silva, chief partner of Apex Investment Group in Massachusetts, pointed out similarities between investor and corporate behavior in the AI and internet bubble scenarios.
“From an investor’s perspective, people want to enter the AI field simply because they hear the term every day in the news,” Silva said. “They aren’t really scrutinizing valuations or considering potential obstacles in the future. As long as it’s related to AI and shows significant growth, investors want in.”
He noted a similar situation from the corporate standpoint. “Companies must invest in AI regardless of whether immediate returns are evident,” Silva said. “As organizational leaders, failing to invest in AI seems like negligence. However, the value of applying this new technology isn’t always clear.”
The majority of reports regarding AI investment returns are vision-based rather than cash flow-based, according to Buckley.
“AI’s productivity enhancements in programming and other fields are real and even exceptional. The issue is that current investment levels are ahead of actual results,” he explained. “The question of how much direct profit AI can bring, how much profit is bundled into existing products, or if it’s just future promises, remains unclear.”
He highlighted that the market devaluation related to AI and its effect on individuals largely depend on their income, savings, and the level of connection with the technology.
Tech currently holds a 34% share of the S&P 500 index, as per data from investment website The Motley Fool. For the average American investor with a diversified portfolio, this means that around one-third of their investments could be influenced, for better or worse.
“This construction of AI is based on the idea that ‘scale equals control.’ If this logic is broken, it’s more likely to lead to a decline in spending rather than a drop in profit margins, stock prices, or rising interest rates—a more traditional cyclical pressure,” Buckley stated.
“While AI’s pullbacks can be reflected in customer reports and have an impact, the bigger concern is whether the market will view this change as a signal of a broader economic downturn,” he emphasized.
Silva warned that if there’s a decrease in AI investment, investors might wrongly perceive bigger issues at play, leading to premature decisions.
He stressed that the five major tech giants do not equate to the entirety of the US economy. However, their proportion in the S&P 500 index returns could give the impression otherwise, potentially sparking further market sell-offs.
Looking at the longer time frame, despite significant changes, the stock market has shown steady growth over time, as noted by Walker. Focusing on the bigger picture is crucial, as today’s market leaders could become “tomorrow’s case studies.”
“Rather than trying to predict stock market crashes or pick the next winner in the AI field, building a risk-based investment portfolio and adjusting it regularly is more effective,” Walker advised. “If your investment plan requires holding 40% of stocks, then in a market downturn, you should add to your holdings instead of panic-selling. During market prosperity, you should reduce your buying. Following market rules always trumps mere prediction.”