The Scary Truth About The AI Bubble

Introduction – The AI Bubble Panic (0:00)

Bo: The AI bubble. It’s the hottest topic in finance right now and investors are scared. We’re going to show you what’s driving this panic and what you can do to protect yourself and your finances. You’ve probably seen this chart and the media frenzy that’s come with it. But let’s take a closer look. This is the flow of money and partnerships in the AI industry. And at the center of all of it, Nvidia.

Understanding Nvidia’s Role in AI (0:22)

Bo: Nvidia’s primary role in the AI industry right now is the making of semiconductors or chips. These chips are tiny devices that process, store, and transfer information. And they are the backbone of AI. AI companies like OpenAI, the makers of ChatGPT, and companies with massive AI initiatives like Microsoft and Amazon, buy millions of these chips to operate their data centers. These data centers are the engine behind AI models like ChatGPT.

The Concerning Chart (0:52)

Bo: But if you look closely, you’ll notice something that looks very concerning about this chart. With virtually all of these companies, hardware and software purchases point to Nvidia. That part makes sense. But you can also see that there are tons of arrows leaving Nvidia through the form of investment and venture capital. And although it hasn’t been finalized yet, the chart even notes specifically that Nvidia has agreed to invest $100 billion into OpenAI. And this is what has Wall Street and a lot of talking heads in a sweat. The fear is that Nvidia is paying those companies to simply turn around and purchase those chips back from Nvidia. It’s not hard to see the concern here. This is leading some to claim that Nvidia is effectively propping up OpenAI, giving them capital to expand by buying chips from Nvidia.

OpenAI’s Financial Reality (1:46)

Bo: And this concern is compounded by OpenAI’s financials. They’re a leader in the industry. Their company is literally built on generative AI and they are a money furnace on paper. In the first half of 2025 alone, OpenAI reported about $4.3 billion in revenue but $8.5 billion in losses. More on that in a moment. And while OpenAI is a private company, meaning we don’t have their full financial picture, this has opened up concerns about the downstream effect on the S&P 500 more broadly. If we take a look at the makeup of the S&P by weight, we can see that approximately 38% of the index is made up of about nine companies and all nine of those companies have heavy investments in AI.

Dotcom Bubble Comparisons (2:30)

Bo: So when you put all this together, valuations are skyrocketing and driving very bullish behavior in very speculative markets. Industry leaders appear to be weak financially and these companies appear to be simply sending money back and forth to one another. All of this is driving major comparisons to the dotcom bubble of the early 2000s when we saw tons of internet and technology companies attract huge investments and hype just to end up going belly up and collapsing. So, is this truly an AI bubble or are we in a dotcom 2.0? Let’s take this one puzzle piece at a time.

Context Behind the Numbers (3:07)

Bo: First, let’s go back to the chart because while it looks really scary, these figures need some context. The major piece of evidence we have to consider is that although these arrows are equal in size on paper, they do represent very different amounts. Nvidia has $77 billion of operating cash flowing in, but only $23 billion in investing outflows. So, while it looks like all of Nvidia’s money is just turning around and going to pay their customers to buy their chips, the actual numbers tell a very different story.

OpenAI’s Growth Strategy (3:38)

Bo: Now, this doesn’t address the OpenAI valuation concerns, but it’s really too early to assess the validity of these claims. And frankly, what we’re seeing with OpenAI and these big paper losses is not necessarily a new strategy for explosive growth technology companies. Amazon was famously unprofitable for nine years and even then held razor thin margins or actually even losses up until the mid-2010s which was 20 years after the company’s founding. There are some concerns about the overall profitability of the OpenAI business model as it exists now though. In fact, OpenAI’s $200 per month top tier subscription hasn’t even become cash flow positive. But the industry is so new and the data is still incomplete. We simply don’t have enough visibility to draw definitive conclusions like many folks are trying to do right now. So it’s not like this whole AI ecosystem is built on some obviously flimsy foundation.

How the S&P 500 Handles Concentration (4:39)

Bo: But that alone doesn’t address the broader concern for the overall market. Yes, the S&P 500 is heavily concentrated in a handful of tech stocks, and history shows that periods of extreme concentration always raise questions about fragility, overvaluation, and whether we could potentially be setting up for another correction. But it’s critical to understand that the S&P 500 is built to handle exactly this scenario. And it does so in three main ways.

Bo: First, very generally is what’s called reversion to the mean. This is how stocks themselves tend to behave over time. All this means is that over performers eventually slow down and under performers eventually recover or drop out. But because indices are groups of holdings, those swings tend to be flattened out. You may have heard the expression trees don’t grow to heaven. This is essentially what that means. It prevents any one surge or crash from dominating the index’s performance.

Bo: Next is what’s called capital rotation, which describes investor behavior, particularly institutional investors. When one sector becomes expensive, money managers see less upside and they take profits. They will then rotate that capital, there’s the term, into sectors they deem undervalued. This process redistributes risk across the whole index. And then last is index turnover. This is likely a process that many folks are more familiar with. If an industry or company collapses, then there are literally thousands of companies lined up to take their place in the index, especially in an index like the S&P 500. Index turnover means that the index tacks left and tacks right to align with the healthiest parts of the economy. Together, these three forces prevent permanent concentration in any one area.

Historical Market Concentration (6:25)

Bo: But we have to acknowledge that yes, right now the S&P 500 is seeing a high concentration in a few companies, but periods of high concentration have come and gone in the past. We can go back and see that in the economic boom of the 1880s, 24% of the stock market’s total value was in just 10 companies. In the 1950s, when large conglomerates were buying up small companies left and right, the top five stocks made up 23% of the index’s weight. And over a quarter of the S&P was made up of just 10 stocks during the dotcom bubble.

Key Differences from the Dotcom Bubble (7:00)

Bo: But let’s look at the dotcom bubble a little more closely because it is far and away the most common comparison to what we’re seeing today. And while it’s easy to say unprofitable tech companies plus investor frenzy equals bubble, the dotcom bubble had a few key differences. First and foremost, rampant fraud. A ton of the top companies in the early 2000s were found to be cooking their books to appear more profitable on paper. While fraud is still possible, today’s far more stringent reporting standards make this kind of behavior much harder, especially for companies that are operating with intense public scrutiny.

Bo: And when they looked at the actual numbers, many dotcom giants were found to have had terrible financials. A huge number were pre-revenue entirely. The entire boom was built on projected future earnings, not actual operating performance. Today, while valuations can certainly still get out of whack, many of the major players in this conversation are sitting on huge cash reserves and they have company infrastructure that is wholly independent from AI.

Bo: And lastly, although it’s a smaller factor, is interest rates. During the dotcom era, years of low interest rates helped fuel the bubble, but the eventual crash was accelerated by the Fed sharply raising rates, which tightened liquidity and made it much harder for unprofitable companies to survive. Today, we’re in the opposite phase of that cycle. Rates are falling, not rising, which reduces financial stress on businesses rather than adding to it. Although they likely remain high enough to prevent that kind of reckless, cheap money speculation that defined the ’90s.

The Reality: No One Knows (8:36)

Bo: So, are we in a bubble? Who knows? There are certainly some signs to give investors pause, but it’s important to acknowledge a crucial difference to avoid making rash or emotional decisions based on past performance. The scary truth is that no one knows when the other shoe is going to drop and correct the market. But even if this is a bubble and even if the market is ripe for a reckoning, this has happened before and it will happen again. And historically, market corrections tend to look smaller and smaller in retrospect. We’ve talked a lot about the dotcom crash today, which looked catastrophic at the time, but now it’s just another blip on the radar for long-term investors. A long-term investing strategy can see periods of volatility fade into little more than small hiccups on your financial journey.

The Importance of Diversification (9:27)

Bo: Is it possible that the S&P 500 could take a multi-year near 50% hit like what it did in the early 2000s? Maybe. But because that maybe exists is why we would almost never suggest that someone’s portfolio be entirely in a single asset class, especially for someone who’s nearing retirement. That’s why we believe in broad diversification across large cap, small cap, international, fixed income, alternatives, and other asset classes that can help smooth that volatility. When it comes to not only getting rich, but actually staying rich, diversification could be one of your greatest allies.

Closing (10:10)

Bo: If you want the breakdown on another investing bubble, click right here. Give us a like if you haven’t already, and as always, keep building toward your great big beautiful tomorrow.