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.
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.
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.