AI Stocks Are in a Bubble… And I’m Staying Away

Artificial intelligence stocks are hot.

Oh sure, they’re expensive. The valuations are absurd. And, just about everybody agrees AI stocks are in a bubble.

But, folks are buying them anyway because, “it’s early,” they say. “There’s plenty of runway.”

Everybody thinks they’ll profit as the bubble continues to inflate. Then, they’ll jump out of their positions before the bubble pops.

Of course, that’s easier said than done. Humans don’t behave that way.

Think back to the days of the dot-com bubble. Shares of Amazon traded as high as $123 (not adjusting for splits) in early 2000. Two years later, the stock was $8.

Prior to hitting $123, though, AMZN traded for $80. And, everyone knew that price was unjustified. The fundamentals of the company didn’t support it. The stock was way ahead of itself. It was discounting the success of the company many years into the future.

It was in a bubble.

Back then, there were two types of investors… There were those who agreed the internet was the wave of the future, and AMZN would lead the way. But, they couldn’t wrap their heads around the valuation, so they stayed away from the stock.

And, there were those who didn’t care about the valuation. A bubble was inflating. They were going to participate. They knew they could cash out before the bubble popped. So, they bought the stock at $80.

And, they cheered as it rallied towards $123 – buying every little dip along the way.

But, they didn’t sell the stock at $123. There was no way to know that was the top of the bubble. Nobody rang a bell. And, if they didn’t care about valuations when the stock was ahead of itself at $80, why would they care at $123?

So, as AMZN pulled back from its high at $123 and fell to $110 these investors treated the dip as they had any other dip along the way. They bought more AMZN.

Then, it fell some more – down 20%. And, the investors bought more. After all, if they liked it at $110 they had to love it at $95.

And, the stock kept falling – eventually hitting $60 per share, more than 50% below its peak.

“I can’t sell it now,” the investors would argue. “AMZN is down 50%. I’m underwater on all of my shares. But, this has to be the worst of it, right? I mean, good companies don’t lose more than 50% of their value, do they?”

Those investors realized they missed their chance to get out before the bubble popped. But, they justified holding onto the shares because the stock had already fallen so much it seemed unlikely there would be much more downside.

Then, the stock kept falling.

Ultimately, the pain of a water-torture-stock-decline – where the stock trickles a little bit lower every… single… day – took its emotional toll.

By the time AMZN traded near its final bottom, near $8 per share, these investors finally threw in the towel. The pain was too much to endure. And, they sold their shares.

That is how humans behave.

Fast-forward to the current situation with AI stocks. Buying into the artificial intelligence sector right now feels to me a lot like buying AMZN at $80 per share in 1999.

The stocks are way ahead of themselves. There’s no way to justify the lofty valuations. But, AI is the wave of the future. And, yes, there probably is more upside ahead for the stocks in the short term.

To buy them right here, right now, though, you have to be confident in your ability to get out of the trades before the bubble pops.

I know I’m not smart enough to do that. So, I’ll let the rest of the folks enjoy the AI bubble party.

I am, however, really looking forward to buying into the sector in late 2026 or maybe 2027.

Best regards and good trading,

Jeff Clark
Editor, Market Minute