Will the US AI Bubble Burst in 2026?

Renowned economist Ruchir Sharma shared his bold predictions on the potential timing of an AI tech bubble burst and key investment trends for 2026.

In a recent interview, Sharma noted that despite the Federal Reserve's ongoing rate cuts, stubborn inflation pressures persist. The US has missed its 2% inflation target for five consecutive years, with next year's rate expected to remain near 3%.

He warned that if strong economic growth and resurgent inflation force the Fed to reverse course with rate hikes, the current overinvestment bubble fueled by AI capital expenditures could collapse.

Sharma outlined three major investment themes for 2026: the potential end of the AI bubble, a resurgence in quality stocks, and the continuation of international markets outperforming US equities.

Interest Rates: The Sole Trigger for Bubble Collapse Sharma emphasized that market confidence in AI has grown so strong that investors pour capital without skepticism. However, he noted this would change when rates rise, stating: "Every bubble or mania in history has been punctured by the same factor - when interest rates finally rise."

The economist advised savvy investors to watch for this signal and exit before the burst. Current inflation dynamics suggest rising rate risks. With inflation likely staying near 3% next year rather than returning to target, and AI-driven capital expenditures potentially accelerating price pressures, conditions for policy tightening may emerge.

Sharma expressed confusion over the Fed's recent dovish tilt, speculating about political pressure or excessive market sensitivity. He observed that any market wobble on rate hike expectations prompts immediate Fed reassurance, as seen when December rate cut odds surged from under 30% to near certainty.

2026 Investment Outlook: Quality Stocks and Global Markets Amid AI bubble warnings, Sharma identified three key 2026 investment opportunities: 1. Quality Stocks: Companies with high ROE and low leverage have suffered historic underperformance, creating buying opportunities. 2. AI Bubble Endgame: The AI investment frenzy may terminate in 2026, though precise timing depends on interest rate movements. 3. International Outperformance: The trend of global markets beating US equities that began in 2025 represents a multiyear cycle, not a temporary phenomenon, offering diversification benefits next year.