AI’s great promise and the shadows of bubbles past

If there’s one thing we know markets find hard to resist, it’s a shiny new technology. The moment a breakthrough captures imaginations, capital tends to stampede in – sometimes rationally, often not. And every decade seems to bring along its own technological gold rush, with investors eager to get in on the ground floor of the next big thing.

First came the dot-com frenzy, when people snapped up URLs with the same optimism reserved for winning the lottery – and roughly the same probability. Then crypto made its way into the spotlight, bringing ambitious ideas about decentralised finance – and a crash course for investors in what holding on for dear life (or HODL-ing) through volatility actually feels like. 

Enter artificial intelligence: the new darling of markets, boardrooms, and investment decks alike. And it’s safe to say that AI fattened up many a balance sheet in 2025. But behind the glittering valuations lurks a lingering question, one that we’ve seen almost daily in the headlines: is this rocket ship heading for the stars or straight into a wall (that looks suspiciously like a bubble we’ve met before)?

Well firstly, the numbers are staggering. Global AI infrastructure investment is projected to hit $5 trillion over the next five years, with tech giants – or the so-called hyperscalers – funding much of this through debt rather than cash flow. The Bank of England’s Financial Stability Report warns that this reliance on credit markets creates a vulnerability “hiding in plain sight”. If sentiment shifts and valuations tumble, the shockwaves could ripple through credit markets as well as equities, amplifying systemic risk for the UK’s open economy.

Valuations have been eye-watering, and we’ve followed this for a while. Nvidia briefly touched a $5 trillion market cap, while Alphabet doubled its value in seven months to $3.5 trillion. Yet even Alphabet CEO Sundar Pichai cautioned that “no company is going to be immune” if the AI bubble bursts. His comments echo concerns from economists and investors who see parallels with the dot-com era – where exuberance outpaced fundamentals and ended in painful corrections. Ouch.

A timely reminder arrived just this morning with the latest from Oracle. The tech giant’s shares slid well over 10% after its latest results and forecasts fell short, despite pouring billions into AI-related infrastructure. The miss rattled investors, raising questions about how quickly even established firms can turn massive AI spending into reliable earnings. It also sparked broader weakness across AI-linked stocks (Nvidia was last seen down 1.4% in premarket trading) - a sign that markets may be getting less forgiving when hype runs ahead of results. 

For UK financial services, the stakes are high. Pension funds and other institutional investors have significant exposure to tech-heavy indices, meaning a sharp correction could leave a noticeable dent in retirement savings and balance sheets. The Bank of England has flagged this concentration risk as AI-focused firms take up an outsized share of global benchmarks. A downturn could trigger liquidity strains and force repricing across asset classes. 

The picture’s not just doom and gloom though. We know the UK remains a magnet for AI capital, attracting £200 million a day in private investment since mid-year 2024, alongside government-backed initiatives to cement Britain as the one of the world’s biggest AI hubs. This influx is creating jobs, supporting infrastructure upgrades, and positioning the UK as a serious global contender. For long-term investors, these fundamentals suggest that while valuations may cool, the technology itself is obviously here to stay. And in a few years, it’ll be hard to imagine a world without it. 

So, what’s unfolding in the market that investors, and finance professionals, can’t ignore?

1. Profitability still matters. Even among larger players, recent earnings have shown that heavy AI investment does not guarantee near‑term profit growth - a reality underscored by Oracle’s results this morning. Smaller, speculative players remain even more vulnerable if they can’t translate investment into earnings.
2. Debt is a rising risk, and the borrowing spree to fund AI expansion could magnify losses if growth stalls, and credit markets may feel the ripple effects.
3. Finally, diversification is essential. Bubbles tied to transformative technologies often generate long-term benefits, but timing and exposure matter. We need to be conscious of overconcentration in AI hype and consider supporting sectors that underpin the ecosystem - such as energy infrastructure and commodities like copper - which may offer more resilient returns during market turbulence.

AI is changing how money moves, how businesses compete, and how economies grow, but history reminds us that innovation and speculation often dance together. For the UK, the challenge is to harness the opportunity while staying grounded.

Easier said than done.