Will the AI Bubble Burst and Drag Down the S&P 500?

• AI enthusiasm is driving S&P 500 gains, but some analysts warn valuations are becoming stretched.
• Wall Street veterans see signs that resemble past bubbles, including concentrated gains.
• If AI spending disappoints, Big Tech’s dominance could amplify downside risks for the broader market.

Artificial intelligence has become one of the biggest forces driving stocks higher. The S&P 500 continues to hit record highs, fueled by investor excitement around AI and massive spending by the world’s largest technology companies.

But a growing number of investors are asking a difficult question: What happens if the AI boom fails to deliver?

Why Some Investors See Bubble Risks

Market commentator Danny recently warned that the S&P 500 may be more fragile than many investors realize.

According to him, investors think they are buying a diversified index. In reality, they are becoming increasingly dependent on a handful of Big Tech companies making enormous AI bets.

Companies like Apple, Microsoft, Alphabet, and Meta are spending big on AI chips, data centers, and infrastructure.

Danny said Big Tech borrowing has surged 357% in a single year as companies seek funding for AI expansion. He believes the spending resembles a fear-of-missing-out race with firms pouring money into projects that may never generate good returns.

If AI fails to deliver meaningful productivity gains, he believes it will become the most expensive bubble in financial history. Accordingly, the S&P 500 will face consequential downfall. In his words, “It will drag the entire S&P 500 into the abyss.”

Wall Street Also Watching 

Bloomberg-cited research suggests that an AI-driven correction could send the S&P 500 down by as much as 20%. 

Jamie Dimon, JPMorgan CEO, has compared current conditions to periods that preceded major market downturns, including 2000 and 2007. Ray Dalio, founder of Bridgewater Associates, has said that U.S. stock valuations are approaching levels seen during previous bubbles.

One of the more notable shifts came from Owen Lamont, Senior Vice President at Acadian Asset Management. Earlier this year, he argued that the market had not yet entered bubble territory. Four months later, however, he warned that “the season of chaos is at hand.”

His concerns were about intense price movements in AI stocks. Since April 2026, the gap between winners and losers in global equity markets has reached levels unseen since the peak of the dot-com bubble.

For example, semiconductor companies Micron Technology and SK Hynix saw gains of 87.8% and 78.6% in May. Despite making up less than 1% of a major global equity index, they accounted for 17% of the index’s monthly return.

Lamont also noted that analysts expect long-term S&P 500 earnings growth of 20.2%. That exceeds the 18.6% peak growth expectation seen during the dot-com boom in 2000.

Fear and Optimism

After a stronger-than-expected US jobs report on June 5, the Nasdaq Composite fell 4.7% for the week. It was the index’s worst weekly performance in more than a year.

AI-related stocks were hit especially hard. NVIDIA fell 6.2%, while Broadcom dropped 7.9%.

Investors worried that higher interest rates could make AI investments more expensive. Some also questioned whether demand for AI services would grow fast enough to justify current spending.

The rebound came just as quickly. Intel surged after securing a major tensor processor order from Alphabet. Marvell Technology gained more than 9% after joining the S&P 500. Micron rose nearly 10% as investors bought the dip.

Meanwhile, Amazon announced a multibillion-dollar agreement with Corning to expand fiber-optic manufacturing for data centers.

The quick selloff and recovery showed how sensitive AI stocks are to economic data, earnings expectations, and investor sentiment.

Can AI Spending Produce Gains?

A 2025 study from the Massachusetts Institute of Technology found that 95% of businesses investing in AI had not yet seen profit from their investments. Companies like OpenAI, Anthropic, and Cerebras Systems generate revenue, but they remain unprofitable.

That has led some analysts to question whether current valuations mirror realistic expectations. Others worry that investors are assuming AI will transform nearly every industry on a much faster timeline than is likely.

Goldman Sachs’ head of global equity research, James Covello, summed up the concern simply: eventually, companies need to produce profits.

Bubble or Long-Term Opportunity?

Not everyone believes an AI collapse is coming.

Some analysts compare today’s spending boom to past investment frenzies in railroads, electricity, and oil exploration. Those sectors required huge initial spending that ultimately paid off.

Market strategist Warren Pies recently argued that if the market is in a bubble, it may still be in its early stages.

Supporters of the AI view also argue that today’s technology giants generate substantial cash flow. Demand for AI computing power remains strong, and companies are investing seriously in expanding capacity.

So, Will AI Break the S&P 500?

The answer remains uncertain.

There is growing evidence that parts of the AI market have become highly speculative. Massive spending, elevated valuations, aggressive earnings forecasts, and heavy concentration in a few technology giants all resemble features of past bubbles.

At the same time, today’s market leaders are very different from many dot-com-era companies. They are profitable businesses with strong balance sheets and significant cash generation.

The biggest risk may not be that AI fails. It may be that expectations have become so high that even strong growth falls short of what investors have already priced in.

If AI spending disappoints, the S&P 500 could face a painful correction because of its reliance on Big Tech. But if AI delivers the productivity gains companies expect, today’s investments could become the foundation of the next technological era rather than the start of a historic collapse.

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