Wall Street is showing signs of “AI-nxiety” as concerns mount over whether the artificial intelligence boom is heading toward a bubble. After months of heavy investment in data centers and infrastructure, alongside soaring valuations for key players, the debate has intensified on whether markets are at risk of repeating past excesses.
The Wall Street Journal recently highlighted the AI spending spree, drawing parallels to the late-1990s internet and broadband craze. J.P. Morgan strategist Michael Cembalest, in a report titled The Data Center Blob, noted that since the launch of ChatGPT in November 2022, AI-related stocks have driven 75% of S&P 500 returns, 80% of earnings growth, and 90% of capital spending growth.
Warnings from investors
High-profile investors are sounding alarms. Greenlight Capital’s David Einhorn warned of “massive capital losses,” while GQG Partners circulated a note titled Dotcom on Steroids. The firm, which has held Nvidia and other AI-linked stocks, said that many major tech companies now represent “backward-looking quality,” suggesting valuations have outpaced realistic growth prospects.
One concern is that the AI buildout is peaking just as Big Tech’s core businesses—digital advertising and cloud services—are maturing. Analysts project Alphabet and Meta’s earnings growth could slow to 6–8% by 2026. Meanwhile, corporate debt issuance to fund AI infrastructure has surged, with tech firms raising $157 billion this year, 70% more than in 2024.
Why this may not be a bubble yet
Not all strategists agree with the bubble narrative. Deutsche Bank argues that hyperscalers generate sufficient cash flow to sustain both heavy investment and stock buybacks. Barclays points out that Big Tech’s spending relative to revenue remains far below that of the telecom sector during the fiber-optic boom 25 years ago.
The S&P 500’s current bull run, up about 80% in three years, is strong but not historically extreme. Five-year annualized returns sit at 16%, below the pace of the late 1990s. Volatility measures also remain subdued, unlike the heightened swings seen during the dot-com era.
Signals to watch
Analysts say true bubble conditions would require runaway market gains, speculative fervor, and rising volatility alongside prices. While AI-linked names have surged, broader indexes remain steady. Equity supply is also restrained: only $180 billion in issuance this year compared with $1 trillion in buybacks, limiting oversupply risk.
Still, there are signs of froth at the edges—penny stocks linked to crypto, speculative private credit deals, and revived meme stocks. Goldman Sachs notes that underlying stock volatility is rising even as indexes appear calm, a setup that has historically preceded sudden corrections.
Outlook
For now, the market remains resilient. The S&P 500 has avoided even a 3% pullback in nearly five months, while leadership rotates between mega-cap tech, energy, and other sectors. AI heavyweights like Oracle, Micron, and Broadcom have struggled despite strong earnings, and Nvidia has stagnated since July, hinting at fatigue.
The Federal Reserve’s tilt toward lower rates still underpins sentiment, though recent inflation data and mixed Fed commentary have added uncertainty. Seasonal factors point to potential weakness into October, but strategists’ cautious 2025 targets suggest expectations are already tempered.
Whether today’s AI boom inflates into a bubble or simply marks another chapter of cyclical market enthusiasm remains an open question. For investors, the key is distinguishing between structural growth and speculative excess before the line between them blurs.
