Fears of an AI bubble have been rising in recent months, but so far any bursting has failed to come to fruition.
These concerns of a bubble come as big technology firms, with sky high valuations, continue to pump investment into AI.
If these firms come crashing down there could be severe economic impacts, job losses and potential for recession.
Earlier this month, the Bank of England warned that there could be a ‘sharp correction’ in the value of major tech players amid stretched valuations and fears that firms won’t be able to deliver on the amount they are spending on AI development.
There are also fears that open source AI models could bring down tech valuations if they prove capable of matching closed competitors.
Meanwhile, software giant Oracle recently saw its shares tumble after it said third quarter revenue is set to be below estimates, while its capital expenditure will reach $50billion next year, up $15billion on prior estimates.
Ahead of Nvidia’s earnings report in November, all eyes were on the chipmaker, with worries that it wouldn’t meet expectations
Room for the bull run to continue
Whether there is a bubble in the AI sector is still very much open for debate.
Undoubtedly, there are similarities to previous stock market bubbles. Companies are throwing money at the tech in the hopes that the enthusiasm around AI will pay off.
However, there is still a disconnect between the capital expenditure on AI and the money being delivered through revenue. Plenty of companies won’t end up as winners in the long run.
Ahead of Nvidia’s earnings report in November, all eyes were on the chipmaker, with worries that it wouldn’t meet expectations. But it did, posting revenue of $57billion for the quarter ended in October, crushing estimates that were billions of dollars lower.
Dan Coatsworth, head of markets at AJ Bell told This is Money: ‘No-one knows precisely if there is an AI bubble and if so, whether it will burst. But there are plenty of warning signs which mean that investors should think seriously about portfolio diversification.’
‘As for what will happen to the AI space next year, expect a greater divide between stocks deemed to be winners and losers in 2026.’
Still, consensus appears to be that AI stocks can still continue to grow.
Neil Wilson, investor strategist at Saxo UK, said: ‘It has a lot of the hallmarks of a bubble, yet it seems there is still juice to be squeezed.’
Likewise, Storm Uru and Clare Pleydell-Bouverie, co-heads of Liontrust’s global innovation team, said: ‘Traditional bubbles are characterised by overbuild and overcapacity; in AI, the defining feature is the opposite.
‘Compute, power and data-centre capacity remain constrained, and the supply response looks set to take years rather than quarters.
It has a lot of the hallmarks of a bubble, yet it seems there is still juice to be squeezed
‘That matters for 2026 because it supports a longer runway for investment and adoption, even as valuation discipline remains essential.’
As a result, Tedder says investors are ‘increasingly interrogating companies’ returns on investment (ROI) in relation to AI. This will intensify in the months ahead, bringing volatility and divergence.’
‘Both offer opportunities,’ he said.
Tedder says those firms that have clear monetisation will see the benefits, while those that don’t will be questioned.
Despite this, Tedder says earnings from AI aren’t always clear where firms are using the tech to enhance certain parts of their business, but aren’t directly earning through licensing and subscriptions.
Tedder said: ‘The uplift is real but not labelled “AI revenue”. The same is true for companies operating in many sectors where AI is deployed to drive improved conversion and profitability.
‘This hidden monetisation is already large – and frequently underappreciated.’
He added: ‘The angst around AI ROI is real and will undoubtedly lead to more volatility in markets in 2026. As in previous innovation cycles, several AI-related firms, both large and small, could fail. But the revenues are emerging.
‘It will take more than a few disappointments to undermine AI’s long-term potential.’
Coatsworth said: ‘Investors have rightfully started to ask when big spending on AI will pay off, and failure to get answers could stoke bubble talk.
‘Those who provide more clarity on the expected pace and scale of financial returns could be the ones to keep the market on their side.’
Are investors too exposed?
For investors, AI has become the fashionable sector to invest in. With the returns of recent years, it is easy to see why.
More than half of UK retail investors, 53 per cent, think AI stocks will continue to rise in 2026, according to figures from Etoro.
‘Retail investors clearly aren’t buying the “AI bubble” narrative,’ Dan Moczulski, managing director at Etoro, said.
‘Retail investors holding their nerve has been a key theme of 2025. Staying invested, buying the dip, investing consistently: many investors have been handsomely rewarded this year by blocking out the market noise and sticking to these golden rules.’
Some 81 per cent said they are confident in their investments as we head towards the new year, just 12 per cent think AI stocks will fall.
However, even as AI stocks continue to deliver on returns, investors do risk being over-allocated to the sector, sometimes even without realising.
Many investors opt for low-cost index trackers that allow them to invest in the likes of the S&P 500 and MSCI World Index.
Doing so though means that their portfolio is heavily weighted towards a small set of US tech stocks.
The magnificent seven alone account for more than a third of the value of the S&P500, while US stocks account for 72 per cent of the MSCI World Index.
Coatsworth said: ‘Spreading risks across sectors, geographies, and asset classes such as bonds and gold could help to limit any blows. History suggests that staying invested is a better course of action than trying to time when to go in and out of the market.
‘Some people might think the key to having too much exposure to US-listed AI stocks is to go with a global equity tracker fund. What they might not realise is that the US will account for a large chunk given its size.’
Coatsworth added: ‘One alternative route is to consider a global equity tracker that excludes the US, such as Xtrackers MSCI World Ex USA.
‘That dials down exposure to the tech sector globally, while also giving greater prominence to financials, industrials, healthcare and consumer stocks.’
Moczulski said: ‘When thinking about increasing or reducing exposure to AI stocks, investors need to separate belief in the technology from belief in today’s valuations.
‘Markets could effectively be triple-counting the AI boom by pricing it into chip makers, cloud infrastructure, and software companies promising to monetise it, and this is all happening at the same time. That only works if demand, adoption, and monetisation all arrive smoothly and quickly.’
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