Since the release of OpenAI’s ChatGPT in late 2022, there’s no question artificial intelligence has been one of the most popular investment themes on Wall Street.
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AI bulls argue the transformative technology will completely change the way companies do business in the coming decades, potentially unlocking trillions of dollars of opportunities for investors. However, critics of AI investing say AI stocks have risen too far too fast in recent years and are now valued based on irrational exuberance rather than an objective assessment of their underlying business fundamentals.
Here are several factors all investors should consider before determining whether they should buy AI stocks:
— Bull market vs. bubble.
— How will AI create value?
— Dot-com era, version 2.0?
— Should you buy AI stocks?
Bull Market vs. Bubble
The first step in diagnosing AI stocks as a bubble or a bull market
is to understand the differences between the two. In hindsight, it seems obvious which periods in the market were bubbles and which periods represented healthy economic expansion. In real time, it can be extremely difficult to decipher.
Market bubbles typically begin as bull markets. Investors recognize a trend in the market, such as the proliferation of the internet, a rising housing market or the emergence of electric power grids, that will certainly create value for corporations and investors. Investors are initially enthusiastic about the developing trends and respond by buying stocks and driving stock prices higher.
However, in a bubble, the exuberance for stocks can transition from rational to irrational. The market loses sight of the fundamental reasons stocks were rising to begin with, and investors start buying simply because stock prices are rising. Further gains are driven by FOMO, or fear of missing out, rather than realistic expectations of future earnings growth.
When looking at industries such as the internet and AI technology, it can be very difficult to tell the difference between irrational exuberance and a rational, long-term mindset. AI technology could potentially create trillions of dollars in value over the next 20 years, so it’s easy to rationalize buying leading AI technology stocks today at virtually any price or valuation.
How Will AI Create Value?
One of the most important questions in determining whether or not AI stocks are in a bubble is: How will AI technology create value and how much will it create?
AI technology experts tout its potential to streamline business operations, reduce or eliminate labor costs and analyze data to come up with novel products and services.
When it comes to leading AI chipmakers such as Nvidia Corp. (ticker: NVDA), it’s easy to see why investors are so excited. Not only will Nvidia benefit from the initial AI investment boom, its customers will need to continually upgrade their chips and servers or risk losing their edge to competitors and becoming obsolete. These constant upgrades will continue to feed Nvidia’s profit growth for as long as the company maintains its position as the leading AI semiconductor company.
AI service providers, such as Microsoft Corp. (MSFT), Alphabet Inc. (GOOG, GOOGL) and Amazon.com Inc. (AMZN), are investing tremendous amounts of money in building their AI models and upgrading their infrastructure. However, AI bulls say these heavy investments are analogous to the massive investments cloud services providers made in the early 2000s. Those cloud investments are now paying off in a major way for companies like Amazon and Microsoft. In 2025, Amazon’s AWS business generated $45.6 billion in operating income. Microsoft’s Intelligent Cloud segment generated $44.5 billion in operating income in fiscal 2025.
Not only is that cloud services profitability contributing significantly to these companies’ overall earnings, it’s also helping to fund investments in future cloud infrastructure and development. Microsoft and Amazon are likely hoping they can reach a similar point with their AI technology in the future.
AI service providers and AI hardware makers will certainly be at the epicenter of the AI technology boom, but the AI revolution could ultimately lift the entire global economy. For example, AI technology can help companies automate routine tasks across industries, freeing up human employees to focus on higher-value activities.
The hope is that AI’s ability to analyze massive amounts of data and generate predictive insights will also help improve enterprise efficiency and facilitate the development of entirely new products and services in fields such as healthcare, finance and transportation.
One challenge that AI technology may face that other tech industries have also navigated is potential disruptions from regulators and lawmakers. AI tech companies will rightfully be subject to laws and regulations related to factors such as safety, ethics, privacy, data collection and accessibility.
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Dot-com Era, Version 2.0?
For value investors, there is certainly cause for concern. Since the beginning of 2023, the S&P 500 has generated a total return of around 94% in less than four years, while the Nasdaq composite has returned about 144% over the same stretch. AI software stock Palantir Technologies Inc. (PLTR) rocketed 1,960% in that period. Shares of AI chipmaker Nvidia are up nearly 1,300% since the beginning of 2023, while shares of AI hardware infrastructure stock Micron Technology Inc. (MU) have soared more than 1,600%.
The S&P 500’s current forward price-to-earnings ratio of 20.5 is only slightly above its 10-year average of 19.9. However, the S&P 500’s Cyclically Adjusted PE Ratio (CAPE Ratio), which is a long-term valuation metric based on average inflation-adjusted earnings from the previous 10 years, is currently 42.1. That CAPE ratio is more than double the S&P 500’s long-term mean ratio of 17.4 and is at the highest level of all time outside of the dot-com bubble.
However, at this time, it seems mega-cap AI technology stocks have not yet returned to the extreme valuations of the dot-com bubble.
LPL Financial recently compared today’s AI boom to the dot-com bubble and found some key differences from a valuation standpoint. First, the AI boom has been mostly led by companies that have diversified businesses that generate internal cash flow rather than relying on speculative capital raising. In addition, the technology sector’s peak forward earnings ratio of about 58 in March 2000 is roughly double the forward earnings ratio of today’s tech sector.
Deon Strickland, financial advisor and in-house economist at Scholar Advising, says the dot-com bubble was more about timing than valuations. In the 1990s, investors and telecommunications companies anticipated the long-term value the internet would create and responded by pouring hundreds of billions of dollars into infrastructure, including fiber-optic cables. When demand didn’t materialize as quickly as anticipated, as much as 95% of this installed fiber sat unused and became known as “dark fiber.”
“So the big question now, and I’m not the only one asking it, is if we’re going to pour these trillions [of dollars] into the backbone of AI, how long is it going to take to pay off?” Strickland says.
“We may not get dark fiber exactly, but we’re not necessarily going to get all the payoff people expect in the time frame investors need to justify the trillions.”
Should You Buy AI Stocks?
If the market is in a long-term AI-fueled bull market, investors should forget that they missed the best window to buy a couple of years ago and get into AI stocks as soon as possible. If we are in an AI bubble, it might be more prudent to wait a year or two for a more attractive entry point. Of course, the market can remain irrationally overpriced for years, and traders who sold or shorted tech stocks in 1997 missed out on some massive gains before the dot-com bubble finally burst in 2000.
Osman Minkara, founder and managing director at CIG Capital Advisors, says long-term investors shouldn’t be chasing hot trends like AI and should instead be focused on building a portfolio that can withstand different market cycles and build lasting wealth.
“Artificial intelligence will likely create tremendous opportunities, but investors shouldn’t confuse a promising technology with a long-term investment performance. Not every company will become a winner, and not every stock deserves its current price,” Minkara says.
Dominic Ceci, chief investment officer at Johnson Financial Group, says investors should remember there’s a difference between an innovative technology and a good investment.
“Buy good companies at reasonable prices, and if one happens to be in AI, so be it,” Ceci says.
“If you buy it for what it is instead of what it’s worth, you’re not investing — you’re speculating.”
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Are We in an AI Bubble? originally appeared on usnews.com
Update 07/20/26: This story was published at an earlier date and has been updated with new information.
