are we in an ai bubble?

19/2/2026

A dual-panel line graph comparing 'Cumulative Total Return' for the Nasdaq and Silver. The left chart shows Nasdaq’s steady upward momentum from Dec-20 to Dec-25. The right chart shows a vertical, parabolic spike for Silver in late 2025, illustrating the text's point that Silver exhibits more 'bubble-like' price action than the Nasdaq.

Are equity markets in an AI bubble? Is AI a bubble? These questions crop up everywhere – from client meetings to magazine covers – and reflect a broad sense of unease. When people ask about “bubble trouble,” what they really want to know is whether markets have become dangerously detached from reality. Here’s how we at Elston think about it: what the data shows, what history suggests, and – crucially – what we’re actually doing in portfolios.

Are we in an AI Bubble?

By Hoshang Daroga CFA, Investment Director, Elston Consulting

Bubble Trouble

At Elston, we have a number of: investment consultants, portfolio strategists for DFMs, asset allocation and risk analytics for fund-of-funds, and investment committee members for UK financial advisers. However we’re engaged, our purpose is the same – to help clients navigate uncertainty, especially of the bubble‑shaped variety.

What exactly is a bubble?

A bubble isn’t defined by a single metric or a tidy threshold that flashes red when crossed. Instead, it’s when prices become unmoored from fundamentals – when what you’re paying no longer aligns with what you’re buying. To make sense of bubble risk, we examine five markers: valuations, growth expectations, financial conditions, supply–demand dynamics, and price action. Individually they’re imperfect, but collectively they paint a meaningful picture.

Valuations: Stretched, but not absurd

Some areas – particularly US megacap tech – are expensive, but importantly, that exposure is optional. Plenty of equity segments still trade on reasonable valuations, including dividend payers, defensives, and factor‑based strategies that offer lower‑beta participation. Today’s market leaders – GPU designers, foundries, hyperscalers – also differ significantly from those of 1999: they have strong earnings. Valuations are demanding, but not based on fantasies.

The chart below shows the Price to Last 12m Earnings Ratio (PER) for the US Tech sector and World Equities. Whilst valuations are stretched they are far below the dot-com bubble.

A historical line chart from 1998 to 2025 comparing the Price to Last 12m Earnings (PER) for US Tech (green) and World Equities (blue). The chart shows the US Tech PER peaking near 80.00 during the dot-com bubble, compared to a current level near 40.00, supporting the argument that current valuations are stretched but not at historic bubble extremes.

Growth expectations: Bold yet plausible

Unlike the late ’90s, when growth expectations became entirely unanchored, today’s implied and actual earnings growth are broadly aligned. Markets are essentially pricing a world where AI becomes a foundational computing layer, driving years of enterprise adoption and IT investment. These expectations are ambitious but not disconnected from economic reality. We’re not in territory where implied revenues exceed anything historically achievable.

The chart below shows the Implied (future) 5 year Earnings Growth Rate for the US Tech sector and World Equities. Its for markets to decide whether the implied earnings growth is a reasonable estimate, or too low, or too high.

A line graph showing the 'Implied (future) 5 year Earnings Growth Rate' from 1998 to 2025. The green line represents US Tech and the blue line represents World Equities. It shows that while expectations for US Tech growth have climbed toward 20% recently, they are still significantly lower than the 40% levels seen in 2002.

The chart below shows the actual (realised) 5 year Earnings Growth Rate for the US Tech sector and World Equities. Thus far double digit earnings have come through. But will it continue, and is it at a reasonable price?

line graph titled 'Nasdaq performance has had momentum but not parabolic,' showing the cumulative total return from Dec-20 to Dec-25. The trend shows a consistent upward trajectory reaching an index value near 200, rather than a vertical spike, indicating strong but non-parabolic growth.

Financial conditions: A very different backdrop

In the dot‑com era, tightening monetary policy ultimately burst the bubble. Today, the environment is almost the reverse. The Federal Reserve and Bank of England are expected to continue easing policy, with rates drifting toward roughly 3.25% over the next year. Softer labour markets and easing inflation skew risks further toward cuts – conditions that can sustain markets even when valuations are elevated.

Supply & demand: The most concerning area

If there’s a genuine amber warning, it’s the intensity of investment in AI infrastructure. Capex on data centres, GPUs, and power systems is exploding, and near‑term returns are uncertain. It’s classic late‑cycle behaviour – not definitive evidence of a bubble, but certainly a high‑risk zone.

Price action: Strong, not parabolic

True bubbles go vertical. Despite strong momentum, especially in the Nasdaq, we’re not seeing the extreme, fear‑of‑missing‑out price spikes characteristic of late‑stage bubbles.

The chart below shows the Nasdaq. Whilst it has enjoyed strong momentum, price action has not been parabolic.

So, are we back in the 1990s?

There are similarities – falling rates, a major tech shift, accelerating earnings – but also critical differences. Margins are higher, investors remain selectively positioned, and global valuations outside US tech are still appealing. The frenzy of 2000 simply isn’t present.

What we’re doing about it

For us, and our adviser and investment committee clients, ensuring resilience is key:

Be selective: Stay invested, but tilt toward defensives, factors, and better‑valued regions.
Be diversified: Blend short‑dated bonds, currencies, and alternatives to create genuine diversification.
Be nimble: Maintain liquidity to adapt quickly; avoid large, illiquid investment trust positions at scale.

Final word

We don’t believe we’re in a bubble – but we are in a market that requires discipline. There is still room for upside, but also reasons for caution. The aim: capture opportunity without taking on unpriced risk.
Be selective. Be diversified. Stay nimble. That’s how to navigate bubble talk without falling into bubble trouble.

Please register if you would like to attend our CISI-endorsed CPD webinar on Ensuring Portfolio Resilience.

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