IS THERE AN ARTIFICIAL INTELLIGENCE BUBBLE FORMING?

04.02.2026 With enthusiasm for all things related to Artificial Intelligence entering its fourth year many investors have begun to worry that a bubble has begun to develop. Below we look at whether this is a valid concern.

By looking back at past bubbles we can identify their key characteristics. By comparing them to current market conditions we can then form a judgement on whether an Artificial Intelligence (AI) bubble has formed.

The first characteristic of bubble is that there must be a new development that promises a paradigm shift. AI definitely ticks this box as it could replace a lot of white-collar work currently performed by humans.

Another feature of a bubble is that there is often an abundance of credit that is available to finance it. Currently there is a lot of money being invested into AI start-up ventures by venture capitalists and large tech companies. However, this has largely taken the form of equity investments rather than debt.

As bubbles inflate debt is often used to finance capital expenditure. So far, the big tech companies have largely financed their AI capital expenditure out of cashflow. Only very recently have they begun to issue debt.

An increasing disconnection between share price valuations and profits is also often present. Currently the valuations of the large quoted technology companies range between 20x and 30x profits. Profits growth has matched the appreciation of their share prices and has ensured that valuations remain pretty grounded. This compares to Cisco Systems in 2000 that was on over 100x profits.

Finally, bubbles are often characterized by the increasing participation of retail investors and first-time investors. Whilst retail investors are undoubtedly active on the US stock market there has yet to be an AI flotation that has garnered massive public participation.

 So, whilst the valuations attached to smaller loss-making AI companies might be rather optimistic it does not seem that we are in a classic bubble like the .com episode of the late 90s. In particular the fact that AI capital expenditure has been largely financed from cash flows as well as the grounded valuations of the Big Tech companies argue against the presence of a bubble.

For information only. Investors should seek professional advice for their own circumstances before making an investment.

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This post was written by Robin