AI is heralded as a technological breakthrough, and it seems as though any product or service you can imagine is implementing machine learning features. It’s becoming an increasingly important part of our everyday lives, and that means companies developing AI tools have experienced incredible growth in recent years.
As an investor, you might see this as an opportunity.
Putting your wealth into tech companies may have proven beneficial recently, so you may consider increasing your investment in this area. However, experts at organisations such as the Bank of England (BoE) and JP Morgan are warning of an “AI bubble”, which could burst at any moment.
If you’re overexposed to AI stocks, you could experience significant losses.
AI companies could be overvalued, leading to a sharp market correction in the future
The AI tool ChatGPT was launched in 2022. Since then, it has become perhaps the most widely known AI application, used by many individuals and businesses.
In October 2025, the Guardian reported that OpenAI – the parent company behind ChatGPT – was valued at $500 billion. This was a significant increase from $157 billion in October 2024.
Another AI company called Anthropic increased its valuation from $60 billion in March 2025 to $170 billion by September of the same year.
Similarly, the Magnificent Seven – a group of tech companies including Amazon, Tesla, and Microsoft, which are responsible for driving a large portion of stock market growth – remain strong, in large part due to their investment in AI. In June 2025, Finder reported that these seven companies made up 36.4% of the value of the S&P 500.
These figures would suggest that investing a notable percentage of your portfolio in tech stocks, particularly AI-focused companies, may be a good strategy for generating strong returns. However, many believe that this success will be short-lived.
According to MoneyWeek, a representative from the BoE warned that “equity market valuations appear stretched.”
In fact, the 10 biggest S&P 500 stocks account for 41% of the total value of the index, but only 35% of its profits.
As a result, the BoE believes the “risk of a sharp market correction has increased”, as investors may soon realise they have been too optimistic about the value of AI stocks.
This could mean that, if you’re overexposed to AI, you face disproportionate losses when the bubble bursts, making it more difficult to generate lasting growth.
Investors found themselves in a similar situation in the early 2000s when the Dotcom bubble burst.
Investors lost an estimated $5 trillion when the Dotcom bubble burst
The rise of home computers and the internet in the 1990s created a situation similar to what we may be seeing now.
Investors correctly assumed that the internet would have far-reaching effects on society and become a crucial part of our lives, much like AI.
Internet companies saw rapid growth and the Corporate Finance Institute (CFI) stated that the value of the Nasdaq index rose by 582% between January 1995 and March 2000. Much of this growth was inspired by the promise of future profits from a booming tech sector as the internet became more widespread.
Some companies performed as expected and are still among the most successful businesses in the world today, including Microsoft, Amazon, and eBay.
However, many companies didn’t fare so well, as they had been hugely overvalued and never delivered the profits that investors predicted. Numerous companies declared bankruptcy when the bubble burst, and the Nasdaq index lost 75% of its value between March 2000 and October 2002.
This essentially eliminated all the gains that had been made in the five years before the bubble burst and led to mass selloffs of Dotcom stocks.
Total investor losses were estimated to be around $5 trillion.
Naturally, we don’t yet know whether AI stocks will face the same fate. However, there are similarities to the Dotcom bubble, particularly in the level of hype surrounding the technology and the extent to which valuations are exceeding actual profitability.
Regardless, the current speculation about AI and the story of the Dotcom bubble highlight some important lessons about taking a measured approach to investing.
It is important to build a well-diversified portfolio and focus on long-term growth
When you see AI companies doubling or tripling their value in a matter of months, it can be tempting to invest heavily in the sector. After all, the promise of significant returns in a short space of time is very attractive.
However, shortcuts in investing rarely work. As the Dotcom bubble shows, trying to reach your investing goals overnight by putting more wealth into AI stocks could backfire and lead to significant losses.
Instead, it’s important to create a well-diversified portfolio that spreads your wealth across various investment types, industries, and geographical regions.
This means you might benefit from growth now by investing a portion of your wealth in AI stocks. Equally, if the bubble bursts, your losses will hopefully be balanced by gains from investments in other areas.
Consequently, you may be more likely to achieve steady growth in the long term while managing your exposure to risk. Overall, this means you could achieve your investment goals without chasing overnight returns and overexposing yourself to the AI bubble.
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Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.