AI technology stocks have experienced volatility in recent months, raising concerns among investors that the market could be in a bubble. But what does a bubble mean and how could one bursting affect investors?
Cognitive bias drives stock market bubbles
A market bubble occurs when stock prices have increased beyond their value and could “burst” (quickly fall in value) as a result.
Bubbles are driven by cognitive biases among investors, such as herd mentality, where investors scramble to invest in certain opportunities because it seems as though everyone else is doing so. This intense interest could lead to share prices soaring even if the intrinsic value of the companies has remained the same.
Market bubbles aren’t a new phenomenon.
In fact, the first recorded bubble occurred in the Dutch Republic, home to the first official stock exchange. In the 1630s, tulips were fashionable and their prices soared, which led to speculative investment. When the demand for tulips collapsed just a few years later, the bubble burst.
Some traders and investors were left holding contracts for prices far higher than their value on the open market.
More recently, investors may remember the dotcom bubble.
Amid the widespread adoption of the internet, startups using this technology soared in value in the late 1990s. Indeed, the US Nasdaq stock market index, which is technology-focused, surged by more than 500% between 1995 and 2000.
At the turn of the century, the bubble burst as it became clear that many of these companies weren’t generating real profits.
Interest in investing in AI has jumped since 2025
Since 2025, there has been an AI boom, with investment in the technology and its use increasing rapidly. This has led to concerns about a bubble.
As mentioned, cognitive biases can create bubbles and herd mentality might be influencing the value of AI stocks. It’s easy to see why investors are keen to invest. AI is an emerging technology that has the potential to revolutionise multiple sectors.
In addition, conversations about AI are taking place in all areas of life, which can lead to a fear of missing out if you aren’t already invested. Herd mentality may lead some investors to make decisions based on this fear rather than their investment strategy.
While AI is an exciting prospect, there are signs that some stocks could be overvalued and may fall if the bubble bursts.
According to an article from the BBC (1 November 2026), analysts predict that 80% of neocloud firms, which operate large data centres that are leased to major AI developers, will cease independent operations.
Indeed, according to Reuters (26 October 2026), the bubble has already burst in China. The STAR50 index of AI and semiconductor companies fell by 40% in less than four months, wiping $480 billion (£358 billion) from its stock market value.
Although there’s speculation that AI stock prices could fall, you should keep in mind that markets are difficult to predict.
A diversified portfolio could provide some protection from a market bubble
Talk of bubbles bursting can be nerve-racking for investors, but there are some things to keep in mind that may ease your concerns.
Although the bursting of the dotcom bubble caused markets to fall, they recovered over the long term. As you’ll usually be invested for a long period, your investments may have a chance to recover if they are negatively affected by a downturn or period of volatility.
It’s also important to note that if AI stock prices did fall, a diversified portfolio could help limit the impact. This means you’re invested in a range of assets, sectors, and geographical locations. This strategy aims to spread investment risk, so a fall in one area may be offset by gains in another.
Of course, investment returns cannot be guaranteed, and you may get back less than you invested. However, a well-diversified portfolio that’s tailored to your goals could provide some protection when a market bubble bursts.
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Please note: This article is for general information only and does not constitute advice. The information is aimed at individuals 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.