Is the AI Investment Frenzy a New Bubble?
The term “bubble” has been echoing loudly in recent months. Whenever stock markets shatter records, propelled by companies tied to artificial intelligence (AI), analysts can’t help but hark back to the year 2000. That’s when the internet hype sent tech stocks soaring–only to crash spectacularly. Are we witnessing a rerun?
A financial bubble emerges when an asset’s price–be it stocks, real estate, or cryptocurrencies–strays far from its intrinsic value. Investors pile in, driven more by hype and FOMO (fear of missing out) than by sound fundamentals. Prices climb as “everyone’s getting rich,” and no one wants to sit on the sidelines. But once the excitement wanes or negative news hits, values plummet, and the bubble bursts.
Put simply, a bubble is a compelling narrative that persuades the masses that this time, “the future will be different.” And that mantra often signals an impending market correction.
Ever since ChatGPT and similar apps showcased the power of generative AI, markets have lavished outsized rewards on sector-linked firms. Throughout 2024 and into 2025, giants like Nvidia, Microsoft, and Alphabet have stolen the spotlight on Wall Street, propelling the Nasdaq to all-time highs.
Take Nvidia: In just two years, its market value has multiplied more than sixfold, eclipsing the GDP of Germany or Japan upon hitting $5 trillion in capitalisation–making it the world’s most valuable company. Profits are surging, but so are sky-high expectations. Some analysts assume AI will revolutionise every industry, rationalising valuations that seem untenable over the long haul.
This isn’t the first time tech innovation has sparked a bubble. In 1999, internet mania propelled thousands of profitless companies to absurd valuations. Slapping “.com” on a business name was enough to lure investors. When reality fell short, the Nasdaq plunged over 70%, wiping out countless firms.
The 2008 crisis was different–not rooted in tech overoptimism, but in rampant debt. The housing bubble, fuelled by risky mortgage securitisation, triggered a worldwide financial meltdown. Yet both episodes shared a core flaw: prices detached from true value, inflated by euphoria and the illusion of endless gains.
So, what’s changed this time?
Unlike the dot-com days, many AI frontrunners boast real profits and commanding market dominance. Nvidia, for instance, enjoys margins over 50% and dominates the global AI chip supply. Banks and institutional investors also appear more cautious, mindful of overvaluation pitfalls.
That said, the psychological parallels are striking: widespread euphoria, market power concentrated in a handful of stocks, and a grand tale of “paradigm shift.” Today, the S&P 500’s seven largest firms account for over 35% of the index–a level of concentration reminiscent of the dot-com excesses. While current earnings underpin some optimism, valuations already bake in flawless future growth.
AI holds immense promise for reshaping the economy and unlocking fresh investment avenues. But history warns that every tech revolution brings hype overload. The key isn’t shunning the sector–it’s staying level-headed: separating firms with enduring business models from those riding a temporary wave of excitement.
As with any budding bubble, the endgame hinges on how long the crowd clings to the belief that this time, really, “the future will be different.”
Diari d’Andorra, 12.11.25