Artificial Intelligence is reshaping the global economy and capturing the attention of investors worldwide, but as enthusiasm continues to build, one key question remains: are we witnessing the dawn of a technological revolution or the formation of another market bubble? In this article, William Lamond, Investment Director, explores the excitement surrounding AI and what it could mean for equity markets, investors and the future of economic growth. With technological innovation continuing to evolve, William considers the broader forces influencing investor sentiment and the importance of distinguishing between short-term market exuberance and long-term growth potential.
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Like 2025, 2026 is looking like another year of strong returns from equity markets. The market has been led by AI (Artificial Intelligence) enablers such as Samsung, Micron, Infineon, Prysmian and to some extent the AI hyperscalers (Microsoft, Alphabet, Amazon, Oracle, SpaceX and Meta). This has fuelled persistent debate over whether markets are inflating a classic bubble. The luddites, predominantly reference the dot-com bubble of the late 1990s, citing unrealistic stock price appreciation, concentrated market leadership, excessive debt supported capital expenditure and underwhelming earnings growth. These similarities look to be unfair as fundamentals demonstrates that current valuations are grounded in tangible earnings growth, real demand, strong balance sheets, and an early-stage technological transformation rather than speculative excess. AI equities are not in a bubble; they are pricing a durable economic boom.
The most decisive distinction from past bubbles lies in profitability and valuation multiples. At the peak of the dot-com era, leading technology firms such as Cisco, Oracle, Corning and Ebay traded at 90x–180x forward earnings, and on average 70x two-year forward earnings. Many companies such as Amazon had negligible or negative earnings, relying on metrics like “eyeballs” or page views to support the investment case. In contrast, today’s AI leaders trade at far more moderate levels. Nvidia’s forward PE (Price/Earnings) multiple has hovered in the high teens to mid-20s, while the major hyperscalers average roughly 18x–25x two-year forward earnings and the semiconductor foundry (fab) companies trade on 3x-13x.
The S&P 500 Information Technology sector sits near 21x 2026 expected earnings, which is elevated to relative long-term averages but roughly one third of 2000 peaks and often in line with or only modestly above the broader Nasdaq-100. Importantly, these multiples are being attributed to companies already generating significant profits.
A bubble typically features overbuilding for customers who never materialise, resulting in unused capacity and a glut once investment slows. The opposite is occurring in AI. Compute demand continues to outstrip supply across the stack, from chips to power and cooling. Microsoft’s commercial cloud backlog has swollen to $678 billion (up 84%), reflecting contracted revenue yet to be recognised. Capacity remains rationed rather than idle. Hyperscaler capital expenditure is largely self-funded from robust free cash flow rather than debt-fuelled speculation or vendor financing of the sort that amplified the telecom build-out of the late 1990s. Corporate profit margins remain near historic highs, and interest burdens are low by historical standards.
Moreover, the AI opportunity remains in its early stages. Global AI spending is projected to reach approximately $2.7 trillion in 2026, a nearly 50 percent increase from 2025. Longer-term forecasts see the broader AI market expanding into the multi-trillion-dollar range by the early 2030s, driven by generative and agentic applications, productivity gains, and enterprise embedding. Studies from McKinsey and PwC continue to project trillions in annual economic value through labour productivity improvements of 0.5–1 percentage point or more in the developed world. Unlike the more speculative consumer-internet applications of 1999–2000, current AI deployment delivers measurable returns in software development, customer service, logistics, and decision making today.
Obviously, this doesn’t imply that there won’t be some casualties, as companies such as CoreWeave and Oracle have looked to facilitate growth with debt financing which could come back to bite them if there is a slowdown in AI adoption caused by either insufficient power grid infrastructure, regulation, elevated interest rates or scepticism from potential customers.
In summary, AI equity valuations in 2026 reflect accelerating earnings, contracted demand, and the early stages of a roll out of a transformative and wide-ranging technology whose productivity potential is only beginning to be realised. We will continue to watch these evolving trends closely and provide any significant update.
The price and value of investments and any income that might accrue may fall as well as rise and is not guaranteed. You may not get back the amount of your original investment.
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