Is the AI Bubble Going to Pop?
The defining market story of the past two years has been the AI trade. We’ve witnessed historic runs across a number of companies capitalizing on artificial intelligence’s rapid rise to mainstream adoption. Along the way, we’ve hit several milestones: the world’s first-ever $4 trillion company, 100% rallies in major names since the April 7th bottom, and fresh all-time highs in both the S&P 500 and the NASDAQ.
That naturally begs the question: when does this trade stop—or does it ever lose momentum?
So far, short-sellers have been steamrolled. Each attempt to call the top of the “AI bubble” has resulted in wave after wave of liquidations. With such strong forward outlooks for the MAG7 names, it’s difficult to imagine a sharp correction, at least in the near term. But history reminds us that no trade runs in a straight line forever, and sector rotation is a narrative that continues to circulate among institutional investors.
One well-worn playbook is the rotation from growth into value. This is a classic tool for both advisors managing client portfolios and asset managers seeking to reduce volatility. The rationale is straightforward: when growth stocks stumble, value often holds up better. A prime example came in 2022, when growth names suffered steep drawdowns while value stocks provided relative shelter during one of the worst market years in decades.
For reference on the chart above: $SPY - Spider S&P500 ETF, $VTV - Vanguard Value ETF, $VTWO - Vanguard Russel 2000 ETF.
Over the past five years, however, the picture has been very different. Value and small caps have significantly underperformed, with value only showing relative strength during the 2022 bear market. This underperformance leaves investors wondering whether another rotation could rebalance leadership—or whether mega-cap tech remains the only game in town.
One valuation tool that often resurfaces in these discussions is the Buffett Indicator, which compares the total U.S. stock market value to GDP. Prior to the 2022 bear market, the indicator peaked above 200%, roughly 69% higher than the long-term trend line and more than two standard deviations above historical norms. Even today, it remains elevated, suggesting valuations are stretched and reinforcing the notion that the AI-driven rally may, in fact, reflect bubble dynamics.
Some of the most eye-catching examples of stretched valuations include Palantir ($PLTR) and newly public names like Circle Internet Group ($CRCL) and CoreWeave ($CRWV). These stocks enjoyed massive upside earlier this year but have since pulled back aggressively, reflecting growing discomfort around their lofty multiples.
Still, labeling this moment a “bubble” misses some of the nuance. While there are parallels to past speculative cycles, the AI infrastructure buildout is still in its earliest innings. The capital flowing into data centers, chip design, energy systems, and enterprise software is unlike anything we’ve seen before in a single sector. To borrow a metaphor: if you’ve ever been knocked off your feet by a wave at the beach, imagine one 100x bigger. That’s the scale of liquidity and investment energy flowing into AI today.
A useful historical comparison might be the oil supermajors in the 1970s and 1980s. To fuel decades of growth, they invested heavily in offshore drilling and global infrastructure. Today, big tech is making an analogous bet pouring unprecedented sums into building the backbone of the AI economy.
Michael Harbin
So how do investors position when the market could move in either direction? That’s the challenge and the opportunity. Timing a bubble is notoriously difficult, but ignoring the scale of the AI wave is equally dangerous.
👉 For a deeper dive into portfolio positioning, including how we’re thinking about Risk-On vs. Risk-Off strategies, check out our latest article linked above.
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Last Updated: 08/02/25
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