Are investors too ahead of themselves in the artificial intelligence (AI) revolution? The market is starting to say yes.

Are investors too ahead of themselves in the artificial intelligence (AI) revolution? The market is starting to say yes.
Are investors too ahead of themselves in the artificial intelligence (AI) revolution? The market is starting to say yes.

Investors have a long history of finding a good idea and then collectively investing in it. The end result is lemming-like behavior that pushes stocks to unsustainable levels. This is how bubbles arise. However, at some point, the reality of the investment idea and the price investors are paying collide, and investors start selling, causing a rush to exit. That’s when the bubble bursts.

The bubble and burst dynamic is so common that entire books have been written about it, with examples dating back to the Tulip Bulb Mania of the 17th century. So the fear of an AI bubble is not something to be ignored. If history is any guide, this technological advancement will lead to overinvestment. There are signs that it may already have reached that point.

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Tulip bulbs may seem like a silly example of overinvestment, but that didn’t stop the price of tulip bulbs from skyrocketing and then crashing. The more recent examples of bubbles are a little more serious. In fact, the last big bubble involved a technology of immense importance: the Internet.

Image source: Getty Images.

The dotcom bubble at the beginning of the century was huge. The tech-heavy Nasdaq-100 index rose sharply and then lost more than 80% of its value. The bear market took a couple of years to develop and was full of relief rallies, with tech stocks rising sharply before continuing their declines. It was a very difficult period for investors.

The Internet was very real and it changed the world. But investors got too far ahead of the Internet, and many paid a high price for their exuberance. Artificial intelligence (AI) is very real and will probably change the world too. But AI stocks could be at a major inflection point, just like dot-com stocks were more than 25 years ago.

^NDX Chart
^NDX data by YCharts

The perfect example of the AI ​​revolution is NVIDIA (NASDAQ: NVDA). Shares of the chipmaker are down about 17% from their 2025 high. Roundhill Magnificent Seven ETF (NYSEMKT: MAGS) is a collection of high-profile stocks led by Nvidia that drove the market higher for years. That ETF is down about as much as Nvidia’s. That’s still correction territory, not a bear market, which requires a drop of 20% or more.

What’s interesting is that Nvidia and the Roundhill Magnificent Seven ETF fell more than 20% in early 2025. At that time, concerns about economic growth arose. Investors are once again worried about economic growth, only this time, a major geopolitical conflict has sent energy prices up sharply. Higher energy prices are already leading companies to raise prices, thanks to higher transportation costs.

However, the conflict in the Middle East is also impacting businesses in other ways. For example, the supply of fertilizers is being affected. That will make it more expensive to produce food or lead to lower crop yields if farmers skimp on these vital plant nutrients. Also at issue are chemicals and other products made from oil and natural gas. A recession seems a much more realistic threat this time, considering that energy markets will take time to return to normal even after the conflict ends.

The most worrying sign for AI in general is that some of the early darlings of the AI ​​market are now deeply out of favor. For example, SoundHound (NASDAQ: SOUND) It is down about 75% from its 2025 highs. Riskier stocks tend to break first when a bubble finally bursts.

If there is a recession and AI stocks fall, the Nasdaq-100 chart above is a chilling warning. The dotcom bust lasted for a couple of years, and it took more than a decade for the index to break even again. It may be too early to say that the AI ​​bubble has officially burst, but taking some money off the table wouldn’t be the worst decision either, given that the risk of a recession appears higher now than in early 2025.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has posts and recommends Nvidia and SoundHound AI. The Motley Fool has a disclosure policy.

Are investors too ahead of themselves in the artificial intelligence (AI) revolution? The market is starting to say yes. was originally published by The Motley Fool

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