AI Frenzy in U.S. Stocks: Will the Bubble Burst?

Although concerns about a bubble in U.S. tech stocks fluctuate, compared to previous tech bubbles—especially the dot-com bubble of the 1990s—we believe the current tech stock market risks are relatively manageable and far from the peak bubble levels seen before.

Since the end of 2022, generative AI has become the world’s most significant industry transformation. The continuous rise of U.S. tech stocks driven by AI has also sparked market fears of a bubble. This article reviews several major historical tech stock bubbles and summarizes typical facts about tech bubbles. Compared to history, we believe that after a clear valuation rebound, current tech stocks carry risks but remain controllable. The situation is far from the peak of past bubbles. With China’s A-shares tech stocks benefiting from a latecomer advantage and supportive domestic policies, investment opportunities in 2026 remain worth watching.

Growing Concerns Over the U.S. Tech Bubble

One of the key topics in the U.S. stock market in 2025 is the tech bubble. Since ChatGPT’s emergence in late November 2022, generative AI has rapidly become the most important theme in tech. On the technical front, large language models continue to upgrade and expand from text to images, sound, and video, with frontier technologies like AI agents, world models, and embodied intelligence developing quickly. These are expanding from IT applications into finance, healthcare, media, retail, and e-commerce. In capital markets, under the rapid development of AI, the U.S. AI sector surprisingly rose against the Fed’s rate hikes in 2023, with continued leadership in 2024-2025, also boosting upstream industries like power and non-ferrous metals. The domestic AI industry chain has similarly surged.

The sustained rise in tech stocks has raised fears of a bubble. Overall, the high valuation levels and market concentration in U.S. tech stocks reflect their strong growth, especially driven by AI. As of early February 2026, the forward P/E ratio of the S&P 500 was 25.4, significantly above the median of 20.3 over the past decade. Market concentration is also high, with the top ten U.S. stocks accounting for 32.1% of market cap. High valuation and concentration levels indicate that while AI-driven growth remains strong, market vulnerability is also increasing.

Looking at the companies themselves, under AI “arms races,” leading tech giants are increasing capital expenditures significantly. However, concerns about the sustainability of their finances and the profitability of AI investments have arisen. Since 2023, major U.S. tech giants—Apple, Microsoft, Amazon, Google, Meta, Nvidia, Tesla—and Broadcom have increased capital spending from $167.5 billion in 2023 to nearly $400 billion in 2025, possibly reaching around $670 billion by 2028. Such large-scale spending erodes free cash flow, and more companies are turning to debt financing, increasing financial pressure. Previously, U.S. tech stocks relied on buybacks to boost EPS, but this approach is now constrained.

Lessons from History: Four Major Tech Bubble Cycles

Historically, stock market bubbles are not new phenomena. Tech bubbles triggered by technological advances have occurred multiple times—most notably during the Canal Mania, the Railway Mania, the Roaring Twenties, and the Dot-com Bubble—each offering lessons for today.

Canal Mania (late 18th - early 19th century): Driven by the Industrial Revolution and urbanization, demand for freight transport surged, leading to a frenzy of canal construction in Britain, which evolved into localized stock market bubbles. The phases included initial construction (1761-1791), peak bubble (1792-1793), and subsequent collapse and differentiation (1794-1820s). The bubble burst as the rise of railways rendered canals less competitive.

Railway Mania (1825-1860s): As the Industrial Revolution deepened, Britain saw a railway construction boom, with phases from initial feasibility (1825-1842), rapid expansion and speculation (1843-1845), to collapse as interest rates rose and overbuilding occurred. The bubble burst in 1846, leading to a long-term shift from growth stocks to utility stocks.

Roaring Twenties (1900s-1929): The second Industrial Revolution fueled rapid growth in electricity, automobiles, aviation, and chemicals, leading to a stock market boom and bubble. Phases included technological incubation (1900-1913), wartime boost (1914-1918), post-war prosperity (1919-1929), and the crash in 1929, which triggered the Great Depression.

Dot-com Bubble (mid-1990s-2000): Excessive optimism about internet and IT companies led to a massive bubble. Phases included pre-bubble buildup (1988-1994), acceleration (1995-1998), peak (1999-2000), burst (2000-2002), and subsequent recovery. The bubble burst amid rising interest rates, overvaluation, and unprofitable business models.

Formation and Burst of Tech Bubbles: Three Conditions and Three Triggers

Deep analysis of these cycles shows that tech bubbles generally require three conditions:

1. Technological Innovation Offering Major Opportunities: From canals, railways, electricity, to the internet, new technologies create productivity leaps. Early successes attract investors—e.g., the success of the Liverpool-Manchester railway in 1830 sparked Britain’s railway craze.

2. Low-Interest Rate Environment: Low rates fuel speculative investments. The 1990s dot-com bubble thrived under a prolonged easing cycle, with cheap money supporting internet startups.

3. Leverage Tools: Instruments like margin trading and bonds lower investment barriers, amplifying asset price increases. For example, in the 1840s railway boom, investors could buy with only 5-10% down; in the 1920s, leverage ratios reached 10x.

Bubbles burst when multiple factors align:

• Overvaluation and Detachment from Fundamentals: By 1929, U.S. stocks’ dividend yields fell below bond yields, signaling overvaluation. During the dot-com bubble, valuations soared—e.g., Nasdaq PE hit 206x at the peak.

• Tightening Financial Conditions: Central bank rate hikes or credit tightening often trigger crashes. The Fed’s six rate hikes from June 1999 to May 2000 precipitated the dot-com bust.

• Technological or Profitability Bottlenecks: When promised profits fail to materialize, bubbles deflate. Many internet companies in 2000 had unsustainable cash burn, with over half running out of cash within a year.

Current Outlook: Will the Bubble Burst? Risks Are Manageable

Despite ongoing concerns, we believe the risks of a tech bubble bursting are manageable and far less severe than past episodes, especially the 1990s dot-com bubble.

From a macro and monetary policy perspective, a bubble burst would require significant tightening of financial conditions and a sharp slowdown in the U.S. economy. Currently, the Fed remains in the late stages of rate cuts, with no active tightening. Its primary goal is to stabilize employment. Market expectations suggest at least 50 basis points of rate cuts remain by end-2026, maintaining a generally accommodative stance. The U.S. economy is expected to experience a moderate recovery in 2026, supported by easing tariffs, the implementation of the “Big Beautiful Bill,” and loose monetary policy, with no clear signs of recession.

From a valuation standpoint, U.S. tech stocks are at relatively controlled levels. As of late 2025, the Nasdaq 100’s P/E was 32.6, up from 24.8 at the end of 2021, but still far below the peak of 206 during the dot-com bubble. For example, Cisco’s P/E peaked at 151 in March 2000 and was 19.7 in February 2026; Microsoft’s P/E peaked at 71.3 in 2000 and was 25.3 in February 2026.

From a financial health perspective, leading tech companies remain solid. The S&P 500’s net profit margin in Q3 2025 was 11.6%, higher than 8.3% in Q1 2000. EPS growth forecasts for 2026 suggest continued high-speed growth, with the tech sector’s EPS expected to rise from 23.8% in 2025 to 25.6% in 2026.

While AI’s high-growth phase may continue into 2026, elevated valuations and market concentration could lead to increased scrutiny of AI’s sustainability and profitability. The debate over an AI bubble may persist, emphasizing the importance for conservative investors to diversify assets and prepare for potential risks. Strategies include sector rotation within U.S. stocks—such as increasing allocations to the Dow, small- and mid-cap stocks, consumer, financials, and healthcare sectors—and globally diversifying into European and emerging markets, as well as multi-asset approaches like U.S. Treasuries and gold.

A-shares Tech Stocks: Investment Opportunities Still Worth Noting

For Chinese A-shares, the recent AI-driven resonance with U.S. tech stocks suggests that a significant correction in U.S. stocks could impact A-shares. However, the profit cycle positions differ greatly: Chinese tech firms are at the early stages of bottoming out in ROE, while many U.S. giants like Nvidia are at record-high ROE levels, indicating stronger growth potential for Chinese companies.

Supported by policies emphasizing technological innovation and a steadily recovering domestic capital market, A-shares’ tech sector remains promising for 2026. The overseas AI industry is expected to maintain rapid growth, with China’s advantages in industrial AI application and cost efficiency becoming more evident. As technology advances and the domestic market’s potential is tapped, China’s latecomer advantage in tech investment is likely to emerge.

2026, as the opening year of the 14th Five-Year Plan, will focus on cultivating new growth drivers and high-quality development. The capital market is expected to perform well in profitability, liquidity, and serving the real economy, creating a virtuous cycle of resource allocation and economic empowerment. As macro policies prioritize technological self-reliance, support for strategic emerging industries like new energy, new materials, aerospace, low-altitude economy, and key core technologies in integrated circuits, industrial equipment, high-end instruments, basic software, advanced materials, and biomanufacturing will likely intensify.

However, the recent AI boom has strengthened the correlation between U.S. and Chinese tech stocks, meaning a correction in U.S. stocks could exert pressure on A-shares. Investors should stay alert to industry developments, select stocks carefully, and maintain balanced allocations.

Author: Yan Xiang, Shi Lin
Authors are: Chief Economist at Founder Securities, and Overseas Macro Analyst at Founder Securities
Source: Financial Expo · Wealth, Issue 3, 2026
Editor: Zhang Yanhua