AI Bubble and Its Implications: Lessons for Smart Investors

The AI revolution has created massive excitement in global markets — but is it another bubble waiting to burst? This article compares the current AI boom with the Dot Com era, explores overvaluation risks, and shares practical tips from Dhanway on how investors can stay protected, diversified, and ready for the next market cycle.

11/9/20252 min read

a close up of a line with a blue background
a close up of a line with a blue background

A Modern Parallel: AI vs. the Dot Com Bubble

The world is witnessing a surge in excitement around Artificial Intelligence (AI) — a wave that reminds many investors of the Dot Com Bubble of the early 2000s. Back then, optimism around internet companies drove the NASDAQ index up sharply, only to see it crash by nearly 80% when the bubble burst.

Today, the market enthusiasm around AI — especially in the U.S. — has created a similar environment of speculation and inflated valuations. The big question is: Are we at the beginning of a massive opportunity, or nearing the end of a bubble?

Understanding How Investment Bubbles Form

An investment bubble forms when expectations about future growth far exceed current financial reality. Many investors participate unknowingly, unsure whether they’re entering early or late.

If this is the early stage of an AI-led cycle, returns could be extraordinary. But if valuations have already peaked, the downside could mean portfolio declines of 50–80% — as history has shown.

For Indian investors, it’s crucial to remember that global markets are deeply connected. A correction in the U.S. can quickly ripple into Indian equities and mutual funds.

Signs of Overvaluation: The Oracle–OpenAI Example

A clear indicator of bubble-like behavior is overvaluation. For instance, Oracle’s stock price jumped nearly 40% in one day following news of a potential $300 billion AI cloud investment by OpenAI.

However, OpenAI’s reported $13 billion in revenue and continued operating losses question the sustainability of such optimism. Investing based solely on future potential — without profitability — echoes the irrational exuberance seen during the Dot Com era.

The Power Concentration: “The Magnificent Seven”

Today’s market performance is dominated by a handful of tech giants — NVIDIA, Apple, Microsoft, Amazon, Alphabet, Meta, and Tesla — often referred to as the “Magnificent Seven.”

These seven companies hold a major share in global indices like the S&P 500, meaning any slowdown in their performance could lead to a broad market correction. For Indian investors, this could affect mutual funds and ETFs with global exposure.

AI Mania and Its Economic Impact

The global obsession with AI has created a rush similar to Tulip Mania in the 17th century. Companies are allocating large portions of revenue toward AI-related projects, sometimes sacrificing short-term profitability.

At the same time, automation is reshaping the job market. Amazon’s large-scale layoffs reflect how technological shifts can displace workers — a reminder that innovation brings both growth and disruption.

Preparing Your Portfolio for the Next Market Correction

At Dhanway, we believe in practical, risk-aware investing. No one can predict when bubbles will burst, but every investor can prepare wisely:

  • Diversify across asset classes — equity, debt, and gold.

  • Avoid overexposure to speculative or single-sector themes.

  • Maintain liquidity to seize opportunities during market corrections.

  • Invest regularly through SIPs to average out volatility.

  • Review your asset allocation annually with a qualified financial advisor.

Market cycles are inevitable — but informed, disciplined investors always come out stronger.