Investment Management: Is the AI Bubble about to burst?

In the late 1990s, investors were captivated by the promise of the internet. Technology was advancing rapidly, and many believed it would transform every aspect of life and business. As a result, money poured into internet start-ups – known as ‘dotcoms’ – often without much regard for whether these companies had solid business models or even any revenue.

Stock prices in the technology sector soared, fuelled by speculation rather than fundamentals. Venture capitalists and retail investors alike were eager not to miss the next big thing, pushing valuations to extraordinary levels. At its height in 2000, the Nasdaq index had more than quadrupled in just a few years.

Some companies, such as Amazon and eBay, proved resilient and established long-lasting success. Many others, including once celebrated names like pets.com and Webvan, could not deliver on their ambitious promises. Confidence faded, and between 2000 and 2002 trillions of dollars were wiped from the market as share prices collapsed. The period offered a sobering lesson about the dangers of speculation, over-optimism, and the pursuit of rapid gains without sustainable foundations.

Two decades later, artificial intelligence appears to be having its own ‘dotcom moment’. Investment and excitement are surging as AI promises to reshape industries, drive efficiency, and unlock new opportunities. Yet echoes of the late 1990s are hard to ignore. Valuations have been climbing steeply, venture capital is flowing freely, and many start-ups are racing to claim their share of a fast-growing market – even when their long-term profitability remains uncertain.

This raises an important question for investors: Is the current AI momentum a sign of genuine progress or the early stages of another bubble? Market nerves are evident, and earlier this month, the so-called magnificent seven technology stocks, many of which have strong AI exposure, experienced notable one-day declines. These movements have prompted some investors to reassess their positions.

As investment in AI continues to grow, markets could follow several paths. One possibility is a soft landing, where growth steadies and AI becomes more deeply sustainably embedded across industries. Another is a sharp correction caused by overvaluation or a high-profile setback that weakens investor confidence. A third outcome is a continued boom, driven by ongoing innovation and faster-than-expected adoption. Each scenario carries different risks and rewards for investors.

Periods of rapid innovation often bring excitement, volatility, and uncertainty. For investors, the important thing is not to react impulsively to short-term movements but to remain focused on long-term goals. Market cycles are inevitable, and history shows that periods of strong enthusiasm are often followed by corrections. Yet over time, markets have recovered and gone on to reach new highs. Some of the strongest market days appear shortly after the weakest, meaning investors who sell in fear may miss the early stages of a rebound.

Timing the market is difficult because it requires getting both exit and re-entry decisions right. Missing either moment can have a significant impact on long-term returns. A more resilient approach is to maintain a disciplined, diversified portfolio spread across different sectors, regions, and asset classes. Diversification cannot remove risk, but it can help reduce the impact of any single downturn and support more stable long-term outcomes.

Ultimately, the AI revolution may prove transformative, but it will not move in a straight line. By staying invested, focusing on fundamentals, and resisting the urge to chase short-term trends, investors can position themselves to benefit from innovation’s long-term potential while being prepared for the inevitable bumps along the way.