Will it burst? AI bubble reality check for investors

Sam Bourgi offers a compelling and timely analysis of whether the current AI tech boom is heading for a crash

From baggy jeans making a comeback to South Park dominating pop culture chatter, it feels like the late ’90s all over again. But beneath the nostalgia, a familiar question nags at markets and media: is today’s tech boom headed for the same kind of crash we saw 25 years ago?

The S&P 500’s top 10 now account for an unprecedented share of total market value, with AI giants comprising a record 23%. For investors in an S&P 500 index fund, nearly 25 cents of every dollar is allocated to just six AI companies. 

Many say, this level of concentration resembles the conditions before the dot-com bubble, and we all remember what happened.  

Back in 2000, the market looked similarly top-heavy. InvestorsObserver reported that Microsoft lost 58% of its value and took nearly 17 years to recover. Cisco collapsed by 82% and has yet to return to its peak price. Intel fell 72% and still trades below its 2000 highs. Industry leaders, no matter how dominant, are not immune to correction.

Fast-forward to today: Nvidia, the biggest AI chip maker, lost $600 billion in value in just one day, thanks to a curveball thrown by a Chinese company, DeepSeek. DeepSeek claims it built AI technology for less than $6 million (competing with systems that cost billions). 

This stresses how fragile valuations based on overly optimistic growth assumptions can be, even when core businesses remain strong.

Should investors be worried? To some extent, yes. If such claims are credible, demand for expensive chips could plummet, dramatically squeezing margins. AI could become a ubiquitous consumer technology, much like the smartphone. 

Regardless of innovation or past performance, no sector is immune to cycles of hype, correction, and disruptive competition.

That said, panic could be premature. Instead, people should use this moment to reassess risks and find value beyond hype-driven trades.

Many investors assume index funds offer diversification, but they represent a substantial bet on AI in today’s market. 

With all the hype, stock prices assume AI will revolutionize everything immediately, when in reality, it’s similar to a gym membership after New Year’s – a classic case of overhyped adoption with limited tangible results, as 95% of companies using AI see zero revenue growth from it.

So, what should your strategy be? Some investors might consider hedging or shorting chipmakers or investing in established firms that generate consistent, sustainable profits, those “boring” companies in sectors like healthcare, utilities, or consumer goods.

My only advice is to diversify. No theme or sector should comprise more than 10% of your portfolio. 

Currently, AI accounts for 23% of the market. While industries like healthcare, utilities, and consumer goods may not be as headline-grabbing as technology, they haven’t lost 82% of their value.

The recent cooling in AI stocks could be an early sign of structural stress. Whether the market stabilizes or unravels further is uncertain. 

What’s at stake is whether the current market leaders can maintain their dominance without falling into the same traps that brought down their dot-com predecessors. However, good companies tend to recover. 

Now might be your chance to rebalance your portfolio. A proportional approach will help you sleep better. On some occasions playing it safe is wise, even if it’s less exciting.

Sam Bourgi is a finance analyst and researcher at InvestorsObserver,source of independent financial analysis, market insights, and investment research for individuals and institutions.