Decline in Concerns Over AI Bubble

Retail investors’ anxiety regarding an “AI bubble” appears to have diminished after peaking this summer. This may suggest that AI stocks still have room to rise before reaching their peak.

Spike in Search Interest

According to Google Trends, the number of searches for the term “AI bubble” hit a high on August 20 and 21, surpassing searches for related terms like “stock market bubble,” “AI boom,” and “crypto bubble.” This surge in interest occurred shortly after a report from the Massachusetts Institute of Technology indicated that 95% of organizations were not seeing any return on their investments in generative AI, which totaled between $30 billion and $40 billion.

Market Reactions

During the same period, Meta announced a halt to hiring for its new AI division after a recent recruitment push, and OpenAI’s CEO Sam Altman suggested that investors might be “overexcited” about AI technologies. The release of OpenAI’s ChatGPT-5 model did not meet consumer expectations.

Potential Risks of an AI Bubble

While the threat of an actual bubble in AI stocks persists, historical patterns indicate that there may still be upward movement. Deutsche Bank strategist Adrian Cox observed that bubbles do not follow a straightforward path. He cited the Nasdaq Composite’s performance in the late 1990s, which experienced fluctuations before reaching unprecedented heights in March 2000, only to lose nearly 78% of its value by October 2002.

Historical Comparisons

Cox pointed out that other market manias have shown similar behaviors, like the railway boom and bust in the 1840s. At its peak in 1847, investors funneled over $1 trillion (in today’s money) into public infrastructure, only to see shares plummet by 1849.

Expectations for AI Stocks

Wall Street analysts predict that AI stocks may continue to climb before a potential downturn. Bank of America’s Nitin Saksena suggested that a more significant bubble could emerge in the AI sector. Similarly, GQG Partners noted that investors might be caught in a “TINA” (there is no alternative) situation, where tech giants continue to dominate despite changes in the market landscape.

Diversifying Investment Portfolios

Looking ahead, MRB Partners strategist Salvatore Ruscitti recommends that investors diversify their portfolios more than usual and consider international investments, as the risk-reward dynamic appears more appealing. He emphasized that with the top ten stocks in the S&P 500 making up over 40% of the index’s market cap, broadening exposure to other equities is essential.