What happens when the AI stock market bubble bursts?
The hottest stocks in the market – Apple, Nvidia, and Meta – reflect the hype from past crashes. Is AI optimism about to crumble?
If there’s one theme that will dominate the stock market in 2025, it may be this paradox. Investors know a lot about the AI bubble, but they’re buying AI stocks anyway.
In a new Motley Fool survey, 93% of investors who own AI stocks said they plan to hold or grow those investments over the next year. Only 7% plan to reduce their holdings in AI stocks.
“I think most investors think of AI as a revolutionary technology, a game-changing technology,” said Asit Sharma, senior investment analyst at The Motley Fool.
But talk of AI bubbles is everywhere.
According to The Motley Fool, the stocks of the “Magnificent Seven” tech giants (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) rose 698% between 2015 and 2024, compared to a 178% return for the S&P 500 as a whole. Some market observers have warned that these gains are due to excessive expectations from artificial intelligence.
AI stocks are expensive. Investors don’t care.
The stock market is historically overvalued, largely due to the phenomenal growth of the Magnificent Seven. From a consumer perspective, the stock is expensive.
How big is the bubble? Consider a metric called the cyclically adjusted price-to-earnings ratio. Measures whether a stock is overvalued or undervalued. As of December 23, the S&P 500’s CAPE ratio is 40.59.
Historically, the only time this ratio was in a higher range was during the peak of the dot-com bubble in 1999-2000. That bubble eventually burst.
Despite talk of a bubble, AI stocks will continue to rise in 2025. Nvidia is up about 36% through Dec. 23, while Alphabet is up about 66%.
Investors continue to buy AI stocks, even though many believe they are historically overvalued.
A Motley Fool survey released on December 15 found that two-fifths of investors believe AI stock prices reflect a “speculative bubble” rather than a “sustainable trend.” The survey was conducted among 2,600 adults.
A separate survey by financial journalism site Investopedia found that two out of three readers think AI stocks are overvalued. 815 investors participated in the December survey.
When Investopedia asked readers to name one stock they would own for the next 10 years, most readers named a company in the Magnificent Seven.
“Most readers surveyed feel there is a bubble in AI and AI-related stocks,” said Caleb Silver, editor-in-chief of Investopedia. “But if you ask them what’s in their portfolio, it’s the same stocks.”
Investors are struggling with AI stocks
The AI paradox is tearing investors apart. Some people are on the sidelines, avoiding AI stocks for fear of a bubble, but in the end they are just watching AI stocks soar. Some companies have invested heavily in AI and are now looking for relief.
“There are certainly people on both ends of the spectrum,” said Jonathan Swanberg, a certified financial planner in Houston. “On one side you have performance seekers who look at year-end earnings reports and want to own more of the best performing stocks. On the other side you have people who want to reduce their exposure to the most successful stocks because they fear the next crash.”
Runaway AI stock prices assume that artificial intelligence will eventually generate huge returns for companies investing in the technology.
Naysayers argue that to date, the payoff has not yet arrived. An influential 2025 report published by MIT found that despite billions of dollars invested in Generative AI, 95% of organizations involved are seeing “zero returns.”
Meanwhile, analysts predict that AI companies will take on more than $1 trillion in accumulated debt in borrowed money with the promise of speculative returns to fund AI projects.
Arguments against the AI bubble focus on the strong profits of tech giants. For example, Nvidia reported record revenue of $57 billion in the third quarter of 2025.
Proponents of the Magnificent Seven note that their reach extends far beyond AI. For example, in addition to pursuing AI, Amazon operates a vast online marketplace, among many other interests. Alphabet owns Google.
“If the momentum of AI in business suddenly stops, they’re not going to go anywhere,” Sharma says.
What happens if the AI bubble bursts?
Analysts have warned that the ongoing AI jitters will cause volatility in AI stocks, bubble or not. Nvidia’s stock seesaw into 2025.
If the AI bubble bursts after 2026, investors can expect some or all of their tech stock holdings to decline significantly.
When the dot-com bubble burst in 2000, the tech-heavy Nasdaq ended up losing more than three-quarters of its value. Many dot com companies went bankrupt. Many large companies survived, and stock prices eventually recovered.
The same scenario could play out with AI. Stock analysts say the key is whether stocks are ready to ride out the bubble.
“Investors are aware of this risk and are determined to invest for the long term,” Sharma said. “They have confidence that the technology itself creates value.”
