Artificial intelligence has driven the stock market to record highs this year, with companies eager to promote their AI capabilities and AI-like investors. Chipmaker NVIDIA soars Regarding expectations for runaway growth.
But a tinge of uncertainty is starting to cast a shadow over that dynamism, as investors worry that the AI boom is on the verge of collapsing.
The astonishing rise in AI stocks is drawing comparisons to the dot-com era of the late 1990s, when many Internet companies suffered huge financial losses but their stock prices soared. When that bubble burst in the early 2000s, the high flyers of yore fell from grace. Like Pets.comdestroyed investors’ portfolios and caused a recession.
Bubbles occur when stock prices soar based on inflated growth expectations that ultimately prove out of sync with the company’s underlying fundamentals. This painful reality check usually ends with the overhyped stock price reverting back to its original value.
Thursday’s stock market selloff, in which soaring AI stocks like Nvidia and Coreweave led the tech-heavy Nasdaq Composite Index to its biggest decline in months, further fueled fears of a new bubble this week.
Beyond the stock market, economists also question whether AI will transform businesses as much as the technology’s proponents claim. Proponents argue that AI will fuel a productivity boom, leading to increased growth and profitability for companies.
“The stock market is making a big bet on AI right now. There are actually 10 companies that are driving it all,” Rebecca Homkes, an economist and lecturer at London Business School, told CBS News.
In other words, the S&P 500’s 15% rise this year has been driven largely by a handful of tech giants investing heavily in AI. According to Morningstar, the market capitalization of the so-called “Magnificent Seven” (Google’s Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) is now a record 37% of the S&P 500’s total.
Irrational excitement?
This may give pause to the millions of Americans who save for retirement in 401(k)s and other plans. When market profits are heavily dependent on a small number of powerful companies, as was the case during the dot-com bubble, the impact could be severe if investors suddenly become weary of AI.
“No one wants to be caught dancing after the music stops,” Aaron Schachter, a portfolio manager at Janus Henderson, said in an email.
Still, stock valuations today aren’t as strong as they were in the late 1990s, Goldman Sachs analysts say. An investment bank analyzed the median price-to-earnings ratio (a measure of a company’s stock price relative to profits) of the seven Magnificent companies and found it was “about half” of the seven largest companies in the late 1990s.
“So while it is true that valuations are high, in our view they are not as high as typically seen at the height of financial bubbles,” they said.
Why is this time different?
The question of whether AI is fueling a bubble similar to the one seen in the late 1990s was also posed to Federal Reserve Chairman Jerome Powell at a central bank meeting on October 29th.
“This is different in the sense that these companies, these highly valued companies, are actually making revenue and so on,” Powell said. “So let’s go back to dot com in the 90s. [period]…These were ideas, not companies. ”
For example, Nvidia, the poster child of the AI boom, saw its revenue more than double to $130 billion and profits increase 145% last year.
While the stock market may not be in immediate danger of bursting, economists are increasingly questioning whether AI companies can live up to the hype and justify the trillions of dollars in capital investment in data centers and other infrastructure needed to power the AI revolution.
For those bets to pay off, experts say, AI will need to transform U.S. business by driving a productivity boom that will boost corporate growth and profitability.
“We want to understand whether this is storytelling or whether it’s an actual tangible benefit,” London Business School’s Homkes told CBS News.
For technology evangelists like Wedbush Securities analyst Dan Ives, the AI boom will lead to a “Fourth Industrial Revolution” that will accelerate economic growth. “This is an AI arms race, and it is Big Tech spending that is driving the next chapter of growth, and it will continue to do so well into 2026,” he wrote in a research note this week.
Homkes agreed that “skeptics need to come on board and recognize that this is a transformative technology,” but noted that such changes are likely to take much longer than some AI advocates currently assume.
