AI bubble: fact or fiction?

Talk about the bursting of the AI bubble in 2025 may be overstated – there is no bubble, according to JPMorgan.
The European Central Bank warned on Wednesday that indices’ increased dependence on a few mega-cap stocks “raises concerns over the possibility of an AI-related asset price bubble”, but America’s biggest bank is more sanguine in its 2025 outlook.
Yes, the biggest stocks are doing the heavy lifting, with JPMorgan noting the so-called magnificent seven stocks now account for 35 per cent of the S&P 500, and 70 per cent of index returns since the beginning of 2023. Furthermore, the 10 largest stocks trade on 29 times estimated earnings, compared to 19 for the rest of the index – a valuation gap JPMorgan sees as “unsustainable”.
If AI delivers on its promise, the broader market should eventually catch up; if AI’s practical applications remain limited, a “catch-down” correction is likely. However, strong fundamentals mean a big “catch-down” is unlikely.
The magnificent seven hold $460 billion on their balance sheets. Extremely low interest rates on Apple’s corporate bonds maturing in 2032 reveal investors’ faith. And unlike the late 1990s dotcom bubble, rising share prices are supported by earnings growth.
Amazon shares are up 46 per cent over the last year but huge earnings growth means its price-earnings ratio has fallen from 48 to 35. Meta shares are up 78 per cent, but it still trades on just 24 times estimated earnings. Nvidia’s surging share price has been accompanied by rocketing earnings. Alphabet, Apple, and Microsoft’s valuations are little changed from a year ago.
“In other words,” says JPMorgan, “what we are seeing today is reality over hope, rather than the hope over reality that prevailed during the dotcom bubble”.