The artificial intelligence (AI) sector has been the darling of Wall Street in recent years, driving record-breaking highs across major indexes like the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite, USA Today reports.
With the promise of reshaping industries and adding trillions to the global economy, AI’s potential has fueled skyrocketing valuations for top-tier companies like Nvidia and Palantir Technologies.
However, some analysts caution that the AI market could face significant turbulence in 2025. Here are four reasons why the AI bubble might burst.
1. Historical Patterns of Bubble Behavior
Historically, revolutionary technologies often experience a bubble phase, where initial hype leads to unsustainable valuations. The dot-com boom of the late 1990s and the more recent excitement over blockchain and the metaverse offer parallels to the current AI euphoria.
While AI holds transformative potential, widespread adoption is likely to take time, and many businesses still lack clear strategies for leveraging the technology effectively. As with past innovations, overestimation of short-term impact could lead to investor disappointment, triggering a market correction.
2. Resolving GPU Scarcity
The supply constraints that have propelled Nvidia’s dominance in AI hardware may ease in the coming year. Nvidia’s GPUs, particularly the high-demand H100 and Blackwell models, have commanded premium prices due to limited availability. However, competitors like Advanced Micro Devices (AMD) are ramping up production, and some major data center operators are developing in-house alternatives to Nvidia’s chips.
If GPU supply balances with demand, Nvidia could face declining pricing power and margins, undermining its stellar growth trajectory.
3. Regulatory and Trade Risks
Geopolitical and regulatory factors pose additional challenges. Under President Joe Biden, the US imposed restrictions on AI chip exports to China, impacting companies like Nvidia and Lam Research. These restrictions are unlikely to ease under President-elect Donald Trump, who has signaled a tough stance on China, including potential tariffs that could ignite a trade war.
Such actions could stifle AI product sales to China, a critical market for many US-based tech firms, potentially denting growth expectations.
4. Overstretched Valuations
The sky-high valuations of leading AI stocks may be unsustainable. Historically, companies at the forefront of transformative technologies have peaked at price-to-sales (P/S) ratios of 30 to 40. In comparison, Nvidia has exceeded a P/S ratio of 40, while Palantir Technologies is nearing 69.
While these companies possess strong competitive advantages, such lofty multiples suggest an overheated market vulnerable to a correction.
