AI Market Crash

Could an AI bubble trigger the next stock market crash — and what should investors do about it?

Artificial intelligence may prove to be one of the most important technologies of our time.

It may also be one of the most enthusiastically priced investment themes.

Those two statements can both be true.

AI is already being used by businesses, governments and consumers around the world. Investment is pouring into data centres, semiconductor chips, cloud computing, software and energy infrastructure. Meanwhile, a relatively small group of large technology companies has played an increasingly important role in driving major US stock market indices higher.

That has led to an obvious question:

Are we witnessing the growth of an AI bubble — and could it cause the next market crash?

The honest answer is that nobody knows.

We do not have a crystal ball, and neither does the person confidently forecasting the exact date of the next crash on social media. Markets rarely send out an appointment invitation before they fall.

What investors can do is understand the risks, examine how exposed they really are and make sure their financial plan does not depend on one sector continuing to outperform indefinitely.

Investment warning: The value of investments can fall as well as rise, and you may get back less than you invested. This article provides general information and does not constitute personal financial advice.

What would an AI market crash actually mean?

An AI market crash would involve a substantial fall in the share prices of companies closely associated with artificial intelligence.

That might include semiconductor manufacturers, cloud-computing businesses, software developers, data-centre operators and the large technology companies spending heavily on AI infrastructure.

A decline in AI-related shares would not automatically cause the entire stock market to crash. However, it could spread into wider markets because many of the largest AI-related businesses now represent a significant proportion of major US indices.

This matters because millions of investors own those indices through pensions, workplace schemes, investment platforms, global funds and low-cost tracker funds.

Someone does not need to own a fund with “artificial intelligence” written on the label to have meaningful exposure to the theme.

What is an AI bubble?

An investment bubble can develop when asset prices rise much faster than can reasonably be justified by current profits, cash flows or realistic expectations for future growth.

Prices may initially rise for perfectly sensible reasons. A new technology emerges, companies begin making money from it and investors recognise its long-term potential.

The danger comes when enthusiasm takes over.

Investors may start buying simply because prices have already risen. Fear of missing out replaces careful analysis. Increasingly optimistic assumptions are required to justify valuations, and disappointing results can then cause sentiment to reverse very quickly.

Crucially, a bubble does not mean that the underlying technology is useless.

The dot-com period is the obvious example. The internet did transform commerce, communication and everyday life, but that did not prevent technology shares from suffering devastating losses. The Nasdaq Composite closed at 5,048.62 on 10 March 2000 and 1,114.11 on 9 October 2002 — a fall of roughly 78%. 

The lesson is not that new technology should be avoided.

It is that a genuinely transformative business can still be a poor investment when too much future success is already reflected in its price.

Why are investors worried about an AI bubble?

There is no single piece of evidence proving that AI shares are in a bubble. There are, however, several reasons for investors to pay attention.

1. Some equity valuations are stretched

In its July 2026 Financial Stability Report, the Bank of England said equity valuations remained stretched relative to company earnings. It also noted that rising equity prices had been driven partly by a narrow group of AI-related companies, increasing concentration in some global indices. 

A high valuation does not tell us when a share price will fall. Expensive markets can become more expensive, and company profits can sometimes grow into previously demanding valuations.

But the higher the expectations built into a company’s price, the less room there may be for disappointment.

A business does not necessarily need to report falling profits for its share price to decline. It might simply grow more slowly than investors had expected.

2. Major indices have become increasingly concentrated

The S&P 500 is often treated as a broad measure of the US stock market, but its largest holdings now have considerable influence over its performance.

According to the State Street SPDR S&P 500 ETF Trust factsheet, its ten largest holdings accounted for approximately 36.3% of the fund at 30 June 2026 when the published individual weights are added together.

Information technology alone represented 38.03% of the fund, while its reported forward price-to-earnings ratio was 22.5. 

This does not make an S&P 500 tracker inherently unsuitable. It does mean investors should understand what they own.

A market-capitalisation-weighted index automatically allocates more money to companies as their market values increase. That can leave investors with greater exposure to the businesses that have already risen the most.

3. Extraordinary expectations are being placed on AI

The AI boom is not based entirely on speculation. There is substantial evidence of real adoption and investment.

Stanford University’s 2026 AI Index reported that global corporate AI investment more than doubled during 2025. Private investment grew by 127.5%, while 88% of surveyed organisations reported using AI. Generative AI was being used in at least one business function by 70% of surveyed organisations. 

That is evidence of genuine commercial activity.

However, rapid investment also creates high expectations. Companies spending tens of billions on infrastructure will eventually be expected to produce an adequate return on that capital.

If revenues, profit margins or productivity gains do not arrive as quickly as markets expect, share prices could adjust.

4. More borrowing could increase the consequences of disappointment

The Bank of England has also highlighted the accelerating use of public and private credit by AI-related companies and infrastructure projects.

Borrowing is not automatically a problem. It is a normal part of financing business investment.

But debt can amplify risk. If expected revenues fail to materialise, heavily financed projects may face pressure at the same time as investors become less willing to fund further expansion. 

Is AI definitely a bubble?

No.

It would be misleading to claim that an AI crash is inevitable.

A 2026 study from the Amundi Investment Institute concluded that the current AI investment cycle had not yet displayed all the explosive valuation characteristics normally associated with a late-stage bubble. However, the study still identified market concentration and the potential amplification of portfolio losses as significant risks. 

That is an important distinction.

The technology is real. Adoption is growing. Some AI-related companies are already highly profitable and have substantial cash reserves. AI may also improve productivity and create entirely new products and markets.

There are several possible outcomes:

• AI-related shares could suffer a sharp correction.
• Prices could move sideways while company earnings catch up.
• Money could rotate from the largest technology companies into other sectors.
• Some AI companies could prosper while weaker businesses fail.
• The sector could continue rising for longer than sceptics expect.

Nobody can reliably tell investors which path markets will take or when conditions might change.

The sensible response is therefore not to construct a portfolio that only works under one prediction.

Why a technology fund can become a much bigger risk than expected

We often meet investors who have done extremely well from a technology-focused fund.

That success is naturally welcome. The problem is that strong performance can quietly change the structure of a portfolio.

A holding that was originally intended to represent a relatively modest proportion of someone’s wealth may, after years of growth, become one of their largest investments. Their future may then depend much more heavily on one sector, one country and a relatively small group of companies.

There can also be considerable overlap between apparently different funds.

For example, an investor might own:

• A US index tracker
• A global equity fund
• A technology fund
• An AI-themed fund
• A growth-oriented managed fund

The fund names are different, but each could have substantial positions in the same underlying technology companies.

Owning five funds is not necessarily diversification if all five are pulling the same cart.

When technology markets are rising, this overlap can produce impressive returns. When sentiment turns, the same concentration can result in losses arriving from several directions at once.

Why timing matters as much as the size of a fall

A market decline does not affect every investor in the same way.

Someone investing regularly for another 25 years may be able to tolerate short-term volatility and continue purchasing investments at lower prices.

The position can be very different for someone who is approaching retirement, taking regular withdrawals or expecting to use a substantial part of their portfolio in the near future.

Selling investments after a large fall can make it harder for the remaining portfolio to recover. This is one reason why investment strategy should be connected to a wider financial plan, rather than selected solely by looking at whichever funds have recently performed best.

MoneyHelper advises investors not to make sudden decisions simply because markets are falling. It also emphasises that nobody knows what markets will do next and that investors approaching retirement should consider whether their investments still match how and when they intend to use the money. 

Our approach at Celtic Financial

At Celtic Financial, high technology valuations and growing market concentration have been on our radar.

That does not mean attempting to remove every technology company from a portfolio or making a dramatic prediction that AI shares must fall.

Being enthusiastic about AI is not an investment strategy. But refusing to own any technology is not much of a strategy either.

Our focus is on identifying and managing excessive or unintended exposure.

Depending on a client’s circumstances, this can involve:

• Looking through fund names to examine the underlying holdings
• Identifying duplication between different investments
• Checking whether past growth has caused the portfolio to drift away from its agreed risk level
• Considering exposure across companies, sectors, countries and asset classes
• Rebalancing where appropriate rather than chasing recent performance
• Matching the investment strategy to future spending and retirement plans
• Considering the costs and tax consequences before making changes

The objective is not to predict the precise moment at which technology shares might fall.

It is to avoid discovering after a fall that far more of your financial future was riding on one theme than you realised.

Diversification remains one of the most practical defences

Diversification means spreading investments across areas that do not all depend on exactly the same circumstances to succeed.

That can include different:

• Companies and business sectors
• Countries and regions
• Asset classes
• Investment styles
• Fund managers
• Maturity dates and time horizons

The Financial Conduct Authority explains that diversification reduces dependence on any single investment performing well and can dilute the overall effect of one holding performing badly. It also makes clear that diversification cannot eliminate investment risk altogether. 

Diversification will not always produce the highest return in a strongly rising market.

A concentrated technology portfolio may comfortably outperform a diversified portfolio while technology shares are leading. That is the trade-off.

Diversification is not designed to win every race. It is designed to reduce the chances that one wrong turn wrecks the entire journey.

Five questions investors should ask now

Rather than trying to predict an AI market crash, investors may find it more useful to ask:

1. How much technology exposure do I really have?

Look beyond the fund labels and examine the underlying companies. Broad global and US funds may hold more technology-related exposure than expected.

2. Do several of my funds own the same companies?

Multiple funds can create an appearance of diversification while repeatedly investing in the same largest shares.

3. Has strong past performance changed my risk level?

A successful investment may now represent a much greater proportion of the portfolio than was originally intended.

4. When will I need the money?

An investor with decades ahead may be able to accept more volatility than someone expecting to retire or make withdrawals shortly.

5. Could I remain invested through a substantial fall?

Risk tolerance is not simply how someone feels while markets are rising. The real test is whether they could avoid panicked decisions after seeing a meaningful decline in the value of their portfolio.

Should investors sell their technology funds?

There is no responsible blanket answer.

Selling everything because of a frightening headline is itself a form of market timing. An investor would need to decide both when to sell and when to reinvest. Getting one decision right is difficult; getting both right is harder.

Equally, holding an investment simply because it has performed strongly in the past is not a sound reason to keep taking an unsuitable level of risk.

Depending on someone’s position, the appropriate response might be:

• Taking no action
• Rebalancing back to an existing investment strategy
• Gradually reducing an oversized holding
• Improving diversification elsewhere
• Restructuring the portfolio around upcoming withdrawals
• Reviewing whether the original investment remains suitable

The right decision depends on the investor’s objectives, tax position, capacity for loss, investment timescale and wider financial circumstances.

The real risk is not knowing what you own

An AI market crash is possible, but it is not inevitable.

AI could deliver profound long-term economic benefits while some AI-related investments still prove to have been overpriced. Alternatively, earnings could grow sufficiently to justify today’s optimism.

We do not know which companies will emerge as the ultimate winners. We do not know whether markets will experience a sudden crash, a more ordinary correction or simply a long period of disappointing returns.

That uncertainty is precisely why diversification matters.

The purpose of good financial planning is not to forecast every market movement. It is to create a strategy that can cope with a range of outcomes — including some uncomfortable ones.

We may not have a crystal ball. But we can have a plan.

Could your portfolio withstand an AI-led market fall?

If technology investments have performed particularly well, it may be worth checking whether that success has created more concentration than you intended.

At Celtic Financial, we can examine the underlying holdings within your pensions and investments, identify duplication and assess whether your portfolio still reflects your objectives, timescale and attitude to risk.

Our initial meeting is free of charge and without obligation. 

Important information

This article is for general information only and should not be treated as personal financial advice or a recommendation to buy, sell or retain any particular investment.

The value of investments and the income from them can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future results. Tax treatment depends on individual circumstances and may change.

Editorial sources

• Bank of England, Financial Stability Report, July 2026. 
• State Street Global Advisors, SPDR S&P 500 ETF Trust Factsheet, data at 30 June 2026. 
• Stanford Institute for Human-Centered Artificial Intelligence, 2026 AI Index Report. 
• Amundi Investment Institute, AI Boom or Bubble? Lessons from the Dot-Com Period, April 2026. 
• Financial Conduct Authority, Diversification, updated 16 May 2025. 
• MoneyHelper, Why has my pension pot gone down in value?, updated 1 July 2026. 
• Federal Reserve Bank of St Louis, Nasdaq Composite historical observations for 10 March 2000 and 9 October 2002. 

Source data checked: 1 September 2026.