AI Bubble, Boom….or Both?
From Code to Concrete. Why the next trillion dollars may be spent less on software and more on power, infrastructure, and industrials.
Wall Street’s focus has shifted. Just a few months ago, investors were worried about a recession. Today, the conversation has turned to rising inflation, persistent interest rates, and whether artificial intelligence has simply run too far, too fast and may lead to an ai bubble and eventual crash.
Many clients find themselves caught between FOMO, the fear of missing out, and JOMO, the joy of sitting on the sidelines waiting for a better opportunity. Our investment thesis for the second half of the year and into 2027 isn’t to chase AI or hide under the mattress. It’s to build a thoughtfully diversified portfolio that can participate as leadership broadens beyond the Magnificent Seven while tactically working to control volatility.
The economy remains surprisingly resilient. Corporate earnings continue to support equity markets, and artificial intelligence remains one of the most powerful long-term growth themes we’ve seen in decades. But after a strong three year rally led by mega-cap tech stocks, future returns are likely to depend more on earnings growth than expanding valuations. We continue to see a path toward our 8,000 S&P 500 year-end target, but expect a much bumpier ride as markets adjust to a prolonged higher-for-longer interest rate environment and possible Fed rate hikes.
It’s been an unusual year. Stocks have remained near record highs while consumer confidence has weakened, inflation concerns have resurfaced, and the CNN Fear & Greed Index (see chart below) has swung sharply back toward fear. The market appears optimistic. Many investors are not.
Magnificent Rotation
The Magnificent Seven, as tracked by the Roundhill MAGS ETF, fell nearly 13% in June, putting it on pace for its worst month since the fund launched just over two years ago (see chart). The group is also modestly negative over the past eight months despite an unprecedented wave of AI investment.
Yet beneath the surface, a very different story is unfolding. While the traditional cap-weighted S&P 500 slipped roughly 2% this month, the equal-weighted S&P 500, as tracked by the RSP ETF, gained about 1.4% and recently recorded its strongest week of outperformance versus the traditional index since June 2020, according to Dow Jones Market Data (see chart).
That tells us something important. Money isn’t leaving the stock market. It’s rotating. That’s healthy. Bull markets rarely end because leadership broadens. They often become healthier because it does.
With the Magnificent Seven now representing nearly 40% of the S&P 500 (source FactSet/S&P Dow Jones) even modest pullbacks in a handful of stocks can have an outsized impact on the index similar to the tech weightings of the 90’s dotcom eara. Beneath the surface, however, investors are broadening their exposure as market leadership begins expanding beyond the largest technology companies.
June Performance: Rotation Beneath the Surface
Investors aren’t abandoning artificial intelligence either. They’re broadening their exposure beyond a handful of mega-cap technology stocks toward the companies building the next phase of the AI economy. At the same time, parts of the software sector have quietly entered their own bear market. Several well-known SaaS companies, including Salesforce and Adobe, remain down more than 50% from their highs as investors question whether AI-native competitors like Anthropic and OpenAI will reshape the industry.
The largest technology companies remain enormously profitable and continue investing hundreds of billions of dollars into AI infrastructure. With the Magnificent Seven accounting for nearly 40% of the S&P 500, they will likely remain an important driver of market returns. The difference is they may no longer be the only story.
Every Revolution Looks Like a Bubble
Every generation believes its technology revolution is different. History suggests otherwise.
Railroads. Electricity. The automobile. The internet. Each sparked enormous optimism, attracted massive amounts of capital, and ultimately transformed the economy. Along the way, every one experienced periods of exuberance, overinvestment, disappointing stock prices, and questions about whether the entire revolution had gone too far.
Artificial intelligence appears to be following a familiar path into an ai bubble.
The world’s largest tech companies are expected to invest more than $700 billion this year alone building data centers, semiconductor capacity, networking equipment, cooling systems, and power infrastructure. Over the past five years (2021–2025), aggregate global AI funding and infrastructure commitments have exceeded $2 trillion, driven largely by Big Tech hyperscaler capital expenditures and a massive influx of private venture capital (Source: Stamford Research)
That’s an extraordinary amount of capital. It also raises an important question. When will all of this spending begin producing returns that justify today’s lofty valuations?
The Four O’s (Bubble Analysis)
Most investment bubbles throughout history have been driven by one or more dominant excesses. I call them the Four O’s.
- Overvaluation
- Overspeculation
- Overleverage
- Overconfidence
The Dot-com Bubble was fueled by speculation and unrealistic valuations. The Financial Crisis was driven by excessive leverage. Today’s AI cycle looks different.
The companies leading this revolution generate billions in profits, produce enormous free cash flow, and have the financial flexibility to fund much of their investment internally rather than relying heavily on borrowed money. That doesn’t eliminate risk. It simply suggests today’s environment more closely resembles an expensive growth cycle than another 2000 or 2008.
Today’s market arguably checks two of the four boxes: elevated valuations and growing investor confidence. So far, it lacks the widespread leverage and speculative excess that defined many of history’s biggest bubbles.
AI Is Becoming an Industrial Revolution
One of the biggest mistakes investors can make is thinking AI is a single investment theme. The first winners were chipmakers like Nvidia. Then networking companies such as Broadcom joined the rally. More recently, memory manufacturers have benefited as demand for high-bandwidth memory exploded.
The next phase may look very different. Think about what artificial intelligence actually requires. You don’t build AI with code alone. You build it with land, steel, concrete, copper, transformers, natural gas, nuclear power, cooling systems, construction workers, financing, and enormous amounts of electricity.
Someone has to build and pay for all of it. Imagine a $50 billion AI data center. The winners extend far beyond Silicon Valley. Utilities. Engineering firms. Electrical equipment manufacturers. Construction companies. Banks financing the projects. Infrastructure companies building the backbone of the AI economy.
The next five years may have less to do with building faster chips and more to do with supplying enough electricity to run them.
We’ve seen this movie before. Everyone remembers Cisco during the internet boom. Fewer remember the billions spent laying fiber-optic cable across America. Much of that investment looked excessive at the time. Decades later, it became the backbone of the digital economy. AI may follow a remarkably similar path.
The Real AI Bottleneck Isn’t Chips. It’s Electricity.
Wall Street has spent the past two years talking about Nvidia. The next five years may be about something much less glamorous.
Power.
According to Goldman Sachs, U.S. data center electricity demand is projected to more than double over the next several years as AI infrastructure continues expanding. Every AI model needs GPUs. Every GPU needs memory. Every server needs cooling. Every data center needs electricity. (see chart)
The real bottleneck may not be chips. It may be generating enough power to run them.
Our Investment Outlook
We continue emphasizing the broadening theme. As we discussed in our midyear outlook, technology remains one of our highest-conviction long-term investment themes. At the same time, we continue finding opportunities across industrials, infrastructure, utilities, energy, financials, materials, and international markets that stand to benefit from the AI buildout.
Investors are not abandoning artificial intelligence. They are following where the next trillion dollars of capital spending is actually going.
History suggests investors don’t have to identify every new winner. They simply need a diversified portfolio positioned to participate as leadership evolves. The AI revolution isn’t getting smaller. It’s getting much bigger than Silicon Valley.
Markets Optimistic. Clients Cautious.
One of the more interesting disconnects this summer is that the stock market appears far more optimistic than many investors.
Most client conversations today are less about what happened during the first half of the year and more about what could happen in the second. The headlines have shifted from war to inflation, interest rates, AI spending, government deficits, and whether the economy can continue avoiding a recession.
Many clients are puzzled that stocks have remained resilient despite concerns over higher oil prices, geopolitical tensions, and growing fears that artificial intelligence may be creating another technology bubble. Our conversations have become less about chasing returns and more about diversification, risk management, and staying disciplined through the inevitable ups and downs.
Some investors are even getting a case of 2022 PTSD. Headline inflation has climbed from 2.4% to 4.2% this year, rekindling concerns that the Federal Reserve may need to keep interest rates higher for longer or even resume raising them. Even if tensions in the Middle East continue to ease, elevated Treasury yields could still create headwinds for both stocks and bonds.
Fear and Greed Index
It comes as no surprise that CNN’s Fear & Greed Index in just the past month has swung back toward the fear zone despite the S&P 500 remaining near record highs. (see chart) We remind clients that the biggest mistake investors can make is confusing a strong market with a low-risk market. Volatility is normal. It’s the price investors pay for earning long-term returns.
From a portfolio standpoint, we haven’t made any dramatic changes. We continue favoring short-duration, high-quality fixed income while maintaining exposure to Treasury Inflation-Protected Securities (TIPS). Within equities, we’re maintaining exposure to technology and AI while continuing to emphasize what we call the broadening theme. Rather than relying on a handful of mega-cap technology stocks, we continue finding opportunities across industrials, financials, infrastructure, energy, and international markets.
One of the more interesting questions I’ve received recently came from a business owner who asked whether he should delay selling his company because he believed AI could double its value over the next few years. I’ve also had clients ask whether artificial intelligence will eventually replace financial advisors.
Those conversations usually become less about managing investments and more about managing expectations
Bottom Line: Artificial intelligence may eventually prove to be one of the greatest technological revolutions of our lifetime. Like every revolution before it, there will likely be periods of excessive optimism, overinvestment, and disappointing stock prices along the way.
That doesn’t mean the opportunity has disappeared. It means the winners are evolving even if we are in an ai bubble. The first phase rewarded software and semiconductors. The next phase may increasingly reward the companies supplying the power, infrastructure, financing, and materials needed to build the AI economy.
As investors, our job isn’t to predict the next headline. It’s to own a diversified portfolio that can participate as leadership changes.
Markets rotate. Innovation doesn’t.
For more information on our firm or to request a complimentary investment and retirement check-up, call (561) 210-7887 or email jon.ulin@ulinwealth.com.
Author: Jon Ulin, CFP® is the founder and Managing Principal of Ulin & Co. Wealth Management, an independent advisory firm based in South Florida for over 20 years. As a fiduciary wealth advisor, Jon helps successful individuals, families, and business owners nationwide with multi-generational planning, investment management, and retirement strategies. Learn more about Jon and our team at About/CV. or call (561) 210-7887.
Note: Diversification does not ensure a profit or guarantee against loss. You cannot invest directly in an index. Information provided on tax and estate planning is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
You cannot invest directly in an index. Past performance is no guarantee of future returns. Diversification does not ensure a profit or guarantee against loss. All examples and charts shown are hypothetical used for illustrative purposes only and do not represent any actual investment. The information given herein is taken from sources that are believed to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as NewEdge Advisors, LLC does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors.
