The U.S. stock market remains euphoric, even in the face of renewed tensions with China and growing concerns about the health of regional banks. While a strong earnings season has helped fuel the rally, much of the excitement still centers around companies tied to artificial intelligence— particularly Nvidia stock, which has become a key driver of market sentiment — as well as OpenAI and AMD.
The problem is that companies investing billions in AI have yet to see clear benefits. For example, Oracle earns just 14 cents in profit for every dollar it makes renting out servers to AI firms. Overall, a study from MIT found that a staggering 95% of businesses experimenting with AI haven’t seen any meaningful economic gains.
And the outlook remains unclear. IMF analysts, in their latest report on the global economic outlook, warned that the current AI boom could end in a spectacular crash, driven by overly optimistic expectations. If that happens, it will not only affect AI-related companies, but the S&P 500 as a whole could also take a hit.
The reasoning is simple: when companies that make up over a quarter of the index start to slip, the rest often follow. We’ve seen similar chain reactions before, like when China tightened its restrictions on rare metal exports. In moments of panic or uncertainty, investors tend to pull back from risk across the board.
So how serious would it be if the AI bubble really burst?
According to that same IMF report, a recession in AI-related markets could mirror the magnitude of the dot-com crisis of 2000-2001. Analysts at J.P. Morgan Asset Management, in turn, simply warned that disappointing results from AI developers could be the biggest threat to the current global stock market rally.
However, the severity of the impact remains unclear, but there are reasons for optimism.
First, systemic risks appear limited, as this bubble is not fueled by debt. Most AI-related investments are backed by tech giants with ample liquidity, meaning that a market correction is unlikely to trigger a banking or credit crisis. Even so, a sharp decline in household wealth could curb consumer spending and weigh on growth.
Second, if the momentum of AI slows, big tech companies have a safety net: share buybacks. When forecasts disappoint, companies often announce large buyback programs, as Nvidia did not long ago. It's a strategy that has helped sustain markets for years and is likely to continue doing so.
And if the situation really deteriorates, there is always the Federal Reserve. As in 2008, the Fed could intervene with aggressive interest rate cuts to help stabilize the economy. Still, given the risks, it may not be wise to invest all your money in AI-related stocks, even if they are the so-called “Magnificent Seven.”
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