LIVE MARKETS-AI bubble, bubble everywhere, well, maybe, maybe not

Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com

AI BUBBLE, BUBBLE EVERYWHERE, WELL, MAYBE, MAYBE NOT

"The artificial intelligence $(AI)$ investment landscape presents a nuanced picture that defies simple bubble characterization." At least that's how Jack Ablin, founding partner and chief investment officer at Cresset, sees it.

According to Ablin, while valuations appear frothy amid pervasive speculation, today’s AI cycle is meaningfully different from what occurred in the dot-com era.

"Profitable operations, robust cash generation, and measurable revenue growth underpin the sector’s strength. However, a critical divergence has emerged between massive infrastructure spending, $400+ billion annually, and limited enterprise monetization success, creating significant risks for 2026 equity markets," writes Ablin in a note.

Ablin admits that AI sector valuations are elevated, but he says they remain structurally different from dot-com peak levels. For example, he says that NVIDIA NVDA.O trades at about 44–47 times past earnings and 24–26 times expected earnings, well below Cisco’s CSCO.O 472 times earnings at the market peak in March 2000.

Additionally, the “Magnificent Seven” trade at roughly 28 times expected earnings, which is about half the tech sector’s valuation during the dot-com era. Meanwhile, the S&P 500 trades at around 26 times expected earnings, which is near a 20-year high.

That said, Ablin points to concerns over whether AI spending is actually paying off, along with issues around concentration risk within the overall ecosystem, as well as a recent shift in sentiment toward the group.

Ablin's bottom line is that the AI investment landscape sits at a critical inflection point entering 2026. "While the AI sector shows familiar signs of a bubble, lofty valuations, heavy capital inflows, and speculative behavior, its strong profits, consistent revenue growth, and cash-funded infrastructure investments point to a selective correction rather than a systemic collapse."

He believes the next 18 months will reveal whether today’s infrastructure buildout proves to be a platform for lasting innovation, or "one of the largest capital misallocations in market history."

Therefore, he recommends investors position defensively through diversified infrastructure exposure while avoiding highly leveraged plays until monetization metrics demonstrate sustainable improvement.

"There’s a small risk that if pilot failure rates persist, the sector could face a bear market with applications companies most vulnerable. The next four quarters of earnings guidance will provide critical data points," he writes.

(Terence Gabriel)

*****

EARLIER ON LIVE MARKETS:

HAVE YOURSELF A DUAL MANDATE CHRISTMAS: CPI, JOBLESS CLAIMS, PHILLY FED CLICK HERE

US STOCKS RALLY AFTER INFLATION, JOBS DATA CLICK HERE

US STOCK FUTURES ADD TO GAINS AFTER LATEST INFLATION NUMBERS CLICK HERE

UBS USING AI TO TRACK CENBANK POLICYMAKERS' TONE CLICK HERE

MORGAN STANLEY SEES 22% UPSIDE FOR EUROPEAN BANKS NEXT YEAR CLICK HERE

STOXX FLAT, 'HOPE AND WARINESS' AROUND BP CLICK HERE

BEFORE THE BELL: MICRON SOOTHES TECH NERVES, EUROPE MIXED CLICK HERE

BOE TO MAKE THE CUT AS OTHERS STAY THE COURSE CLICK HERE