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Are We in an AI Bubble? And What That Means for Investors

Listen to Best in Wealth Podcast Episode 266

Investors have short memories—until the talk of a “bubble” resurfaces. We take investors on a quick trip down memory lane, discussing the infamous dot-com bubble of the late ‘90s and early 2000s, as well as the housing bubble that appeared a few years later. These bubbles were fueled by sky-high optimism and wild speculation about transformative technologies. In the dot-com era, investors rushed into any company with a “.com” at the end of its name, confident the internet would change the world. But not all of these companies survived. The lesson is that when a game-changing technology or a new technology appears, you still have to do your due diligence to come out on top.

The Age of AI: Bubble or Breakthrough?

The “Magnificent Seven” (Google, Meta/Facebook, Apple, Amazon, Nvidia, Tesla, and Microsoft) are pouring billions into AI. Their 2025 returns, as catalogued by Scott Wellens, were impressive, with the group averaging over 20%, outperforming the S&P 500. Yet, such meteoric rises echo the euphoria of past bubbles.

But excitement alone does not make a bubble—overvaluation does.

Valuation: How Expensive is Too Expensive?

A key measure is the price-to-earnings (P/E) ratio, a classic way to judge if a company’s stock price is justified by its profits. Take Tesla, for example: at the end of 2025, it traded at roughly $450 per share but earned only $1.50 per share, putting its P/E near 304. Compared to Toyota’s P/E of about 10, that’s nosebleed territory. The S&P 500’s long-term average P/E sits around 20—a point of reference emphasizing just how stretched AI-heavy stocks may be.

The Magnificent Seven’s average P/E now hovers around 68, more than triple the broader market’s historic average and well above the S&P’s “other 493” companies. While high valuations do not guarantee a crash, they signal that expectations are sky-high and that disappointment could be costly.

Picking Winners, Dodging Losers

You cannot invest in AI itself; you invest in companies riding the AI wave. History shows many will not make it. That is why betting everything on a few horses is extremely risky, even if their role in AI seems promising today.

Over-concentration lurks as a hidden threat. If you own a standard S&P 500 index fund, 35% of your portfolio sits in the Magnificent Seven. For tech-heavy indices like the Nasdaq, that figure climbs to 54%. A stumble for these stars—already started in early 2025—can spell big trouble for portfolios tied too closely to their fortunes.

The Case for Global Diversification

So how can investors harness AI’s upside without exposing themselves to catastrophic risk? In a portfolio spanning thousands of companies worldwide across different sectors and asset classes, your exposure to the Magnificent Seven (and thus to AI) drops to about 20%. This cushions your wealth from the fallout if today’s leaders falter and gives you a stake in the next wave of winners, wherever they arise.

This approach also positions you to benefit from asset classes that look attractive in the current environment. Small-cap and value stocks, as well as international and emerging markets which are currently trading at lower valuations and are performing well. History shows that asset classes cycle in and out of favor. Diversification helps you ride out the storms and participate in future growth, whatever sector it comes from.

Nobody can say with certainty whether we are flying high in an AI bubble or witnessing the birth of the next economic revolution. Instead of gambling on a forecast, smart investors build durable, globally diversified portfolios. That way, you are not only prepared for the promise of AI but also protected from the possibility of another bubble burst.

Outline of This Episode

  • [03:59] How bubbles in investing have formed in the past
  • [05:09] The largest 7 companies in the United States believe that AI is the future
  • [06:59] What price-to-earnings ratios reveal about AI-focused companies
  • [10:18] Toyota vs. Tesla: An example valuation comparison
  • [13:10] Should you invest in companies that use AI?
  • [15:07] An S&P 500-only portfolio is not diversified
  • [20:54] Diversify globally for the best chance of financial success

Connect With Scott Wellens

Podcast Disclaimer:

The Best In Wealth Podcast is hosted by Scott Wellens. Scott Wellens is the principal at Fortress Planning Group. Fortress Planning Group is a registered investment advisory firm regulated by the US Securities and Exchange Commission in accordance and compliance with securities laws and regulations. Fortress Planning Group does not render or offer to render personalized investment or tax advice through the Best In Wealth Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.