The AI hype bubble: is it real & what happens if it bursts?

There’s growing sentiment around AI that inflated expectations, aggressive spending and reliance on a small cluster of market leaders resemble the early stages of previous technology ‘bubbles’ that have subsequently ‘popped’.

While some executives and investors contend that AI represents a genuine technological shift — comparable to the advent of the internet or mobile computing (the dot-com era) — others are more cautious. With the so-called ‘Magnificent 7’ — Alphabet (Google), Amazon, Apple, Meta, Microsoft, Nvidia and Tesla — maintaining a disproportionate influence on major indices such as the S&P 500, broader market performance is now closely tied to continued confidence in AI-led growth.

So, where does the truth lie and what happens if the AI ‘bubble’ does burst? Here, Maya Tajuddin, Ola Phillips and Colin Bell from our technology sector team offer their expert perspectives.

The Magnificent 7 & why they matter

The ‘Magnificent 7’ have played a central role in developing the infrastructure and applications that underpin modern AI systems. 

Nvidia’s advanced semiconductors power the data centres that are used to train and run large language models. Microsoft and Amazon provide the cloud platforms that support global AI deployment. Alphabet and Meta have integrated AI into search, advertising and social media systems. Apple and Tesla embed AI into consumer technology, from smartphones to autonomous driving features. 

While their combined investments have helped to drive rapid innovation internationally, they’ve also concentrated stock market growth around a relatively small number of companies. 

Growing concerns

An economic bubble occurs when asset prices rise rapidly based on high expectations that aren’t matched by underlying financial performance. In the context of AI, critics argue that market enthusiasm may be running ahead of real-world profitability, with vast sums being invested in infrastructure and development before clear revenue models are fully established.

The Bank of England has said that the growth of the AI sector in the next five years would be fuelled by trillions of dollars of debt — raising the risk of financial instability if company values fall. It has further warned of growing fears around an ‘AI Bubble’, stating that share prices in the UK are close to the "most stretched" they’ve been since the 2008 global financial crisis, while equity valuations in the US are reminiscent of those before the dot-com bubble burst.

Even figures at the heart of the AI boom strike a cautious note. OpenAI’s chief executive, Sam Altman, has repeatedly acknowledged the risk of over‑exuberance — emphasising that while AI has profound long‑term potential, its immediate economic impact is often overstated.

Similarly, Sundar Pichai, CEO of Alphabet, said that while the growth of AI investment had been an "extraordinary moment", there’s some "irrationality" in the current AI boom.

Interdependence & competition law

Further exacerbating these issues is the reliance that the ‘Magnificent 7’ companies have on one another. An interconnected web of dependencies is increasingly evident, where investment flows from the ‘top’ companies to the smaller ones. Microsoft, for example, has invested more than $13bn into Open AI to enable it to build computing resources. 

This level of interdependence brings competition law sharply into focus. Heavy cross‑investment, preferential partnerships and control over such critical technology infrastructure like cloud platforms, data centres and AI chips may risk entrenching market power among a small number of dominant players. 

Regulators may therefore question whether these relationships are restricting healthy competition by limiting market entry for start-ups and scaling businesses.

The alternate perspective

Yet it’s not all doom and gloom. Many others reject the characterisation of current market conditions as a bubble, instead arguing that investment levels are broadly supported by underlying fundamentals. 

Goldman Sachs, for example, has suggested that while tech company valuations have risen sharply, they remain materially below the extremes seen during the dot‑com era and are underpinned by strong earnings growth. Similarly, Amazon CEO Andy Jassy directly rejected the notion of an AI bubble, describing AI as a “once‑in‑a‑lifetime opportunity”. 

The Internal Monetary Fund has taken a more nuanced position but notes that AI investment is currently smaller as a share of GDP than during the dot‑com boom and is predominantly equity‑financed.

What if the AI bubble bursts?

Hypothetically — if an ‘AI bubble’ were to exist and ultimately burst — the consequences have the potential to extend far beyond the technology sector. Since the ‘Magnificent 7’ account for such a significant proportion of global equity markets, any sharp correction in their valuations could trigger wider market instability. 

Comparisons are frequently drawn with the dot-com bubble burst of the late 90s and early 00s. This burst saw internet companies rapidly increase in value as investors piled into what was then a new and transformative technology: the internet. When expectations proved to be unrealistic, the bubble burst, share prices fell sharply and many businesses collapsed as the markets were inherently and systemically interconnected. 

At a macro level, a correction in AI‑related valuations could heighten volatility across global financial markets, particularly given the concentration of capital that largely rests within a small number of technology companies and firms. On an institutional level, pension funds, insurers and asset managers with heavy exposure to large technology stocks could face portfolio pressures, while venture capital and private equity investing and funding for early‑stage AI companies may tighten significantly. This may lead to fewer, smaller players dominating the market, delays to new product development and closer scrutiny of companies whose valuations are built on long‑term expectations rather than current financial performance.

It wouldn’t be good news for us as individuals, either. If confidence in the AI market rapidly erodes, the knock‑on effects could be felt by individual investors through falling pension values, ISAs and investment portfolios — particularly where holdings are concentrated in major technology stocks or index funds.

The verdict

It still feels too early to definitively state that an AI bubble exists. The coming months will test not only AI’s commercial potential but also the ability of markets and institutions to absorb innovation without repeating the excesses of earlier bubbles.

The speed at which capital has flowed into a small number of dominant firms raises legitimate concerns about systemic risks — particularly if projected returns take longer to materialise than expected. 

However, unlike during the dot‑com era, many of today’s leading AI firms are profitable, mature businesses with entrenched market positions. This distinction may provide some resilience if expectations reset.

Talk to us

AI-driven growth — and any potential correction — is already shaping investment strategy, valuations and dealmaking. Our team of tech sector specialists can help you to understand what these shifts mean for your business and how to position yourself effectively.

We advise high‑growth tech companies, investors, private equity‑backed transactions and institutional investment structures, offering a fully integrated approach across the deal lifecycle. 

To discuss how we can support you, call 0333 004 4488, email hello@brabners.com or complete our contact form.