Volatility in US stocks cast doubt on resilience of AI rally

• Several high-flying AI stocks have seen steep pullbacks in recent days, amplifying worries that market enthusiasm may be outstripping the technology’s near-term capabilities.
• Analysts warn that risks surrounding corporate capital spending, data centre infrastructure, and supply chain constraints—particularly energy resources and memory chips—should not be ignored.

The sharpest bout of volatility in US stocks in months has exposed fissures in the artificial intelligence-fueled rally, leading investors to question whether the market has entered a speculative bubble that could now be bursting.

Despite soaring valuations in AI-related stocks throughout 2025, concerns over exuberance intensified this week when a strong earnings report from AI bellwether Nvidia failed to reignite the stock or the broader market.

The subdued response has prompted investors to scrutinise the sustainability of AI-driven gains and the timeline for AI investments to deliver tangible profits.

Several high-flying AI stocks have seen steep pullbacks in recent days, amplifying worries that market enthusiasm may be outstripping the technology’s near-term capabilities.

Mounting anxiety

Retail investors, who played a pivotal role in driving previous tech rallies, now appear less eager to “buy the dip,” further denting sentiment. Meanwhile, Oracle’s plans to increase its already substantial debt to finance AI infrastructure triggered a selloff in its bonds, and lenders are demanding greater protection for loans to major tech firms, citing mounting anxiety over debt-backed AI expansions.

These developments have sparked comparisons to historic financial manias such as the late-1990s dot-com boom and the recent cryptocurrency craze.

At the crux of investor anxiety are lofty valuations: The so-called Buffett Indicator, which measures total US stock market value relative to GDP, recently surged above 200 per cent—eclipsing even the dot-com bubble peak and reaching its highest recorded level.

Frothy investor optimism

Other metrics, like the S&P 500’s forward price-to-earnings ratio and the cyclically adjusted price-to-earnings (CAPE) ratio, also point to elevated market pricing.

Even so, recent pullbacks have yet to bring valuations in line with long-term averages, and signs of frothy investor optimism remain subdued.

The American Association of Individual Investors (AAII) weekly survey shows bullish sentiment at 38 per cent—close to its historical mean, and far below the euphoric readings seen during past manias, including 75 per cent in January 2000 and 57 per cent amid the 2021 meme-stock surge.

Alphabet CEO Sundar Pichai recently cautioned that no company would remain untouched if the artificial intelligence boom collapses, while Nvidia chief Jensen Huang this week dismissed concerns of speculative excess.

Historical precedent demonstrates that asset bubbles deflate in varying ways—from the drawn-out Japanese stock market malaise to the rapid 2021-22 crypto unraveling—offering little certainty about the path ahead.

As investors weigh whether today’s AI enthusiasm is justified optimism over a transformative technology or simply the latest case of market excess, analysts warn that risks surrounding corporate capital spending, data centre infrastructure, and supply chain constraints—particularly energy resources and memory chips—should not be ignored.

The coming months will test whether AI’s promise can deliver profits before market caution gives way to a broader reckoning.