What might the AI bubble bursting mean for your investments?

It has been difficult to ignore the rapid rise in AI-linked stocks over the past few years.

According to the Guardian, the S&P 500 – which tracks the 500 largest companies in the US – has risen by nearly 80% over the past five years, a jump that has been driven by tech firms with a stake in the AI boom.

However, some of these companies appear to have taken a hit in recent weeks as investors reassess whether the rise can continue at the same pace. 

As such, you may be wondering what might happen to your portfolio if enthusiasm for AI-linked stocks faded more sharply.

Continue reading to discover what has happened and what a hypothetical AI bubble bursting could mean for your long-term plans.

AI-linked companies have fallen as investors question high valuations

At the end of July, several AI-linked firms experienced sharp declines worldwide.

The Guardian reports that US chip stocks – including Intel, Advanced Micro Devices, SanDisk, Western Digital, and Seagate – all fell by more than 4% when Wall Street opened on 28 July.

Meanwhile, the Nasdaq 100 fell into correction territory, dropping as much as 1.8% at one point, leaving it more than 10% below its early-June record high.

However, this sell-off wasn’t limited to the US. 

South Korea’s market also came under pressure, with semiconductor companies SK Hynix and Samsung Electronics both falling by more than 10%.

A few days later, South Korea’s Kospi Index recorded its worst month since October 2008, despite a sharp rebound by the end of the week.

These falls don’t necessarily mean the AI boom is over, but they do show how quickly sentiment can change when a popular surge has already delivered strong gains.

When investors expect a company or sector to grow rapidly, share prices can move ahead of current profits. This can be justified if future earnings eventually catch up.

Yet, if doubts emerge about demand, competition, or supply chains, valuations can quickly fall, and this seems to be what has happened in recent weeks.

Chinese developments have also challenged confidence in Western chipmakers

Another trigger for the recent market turbulence was a series of developments in China. 

The Chinese memory chipmaker CXMT rose by 466% in value on the Shanghai stock market on Monday 27 July.

On the same day, reports suggested that China had developed its own tools for deep-ultraviolet lithography, a technique used in the computer chip supply chain that had previously been dominated by the Dutch company ASML.

This unsettled investors because Western chipmakers have benefited significantly from the AI boom.

If China can develop more of its own chipmaking capabilities, it could reduce reliance on Western suppliers over time, increasing competition and putting pressure on prices.

A bursting AI bubble could create short-term volatility

It’s vital to take care with the phrase “AI bubble”. Nobody knows whether AI-linked shares are truly in a bubble, whether prices will continue rising, or whether some areas of the market will fall further.

However, you can still consider what might happen if investor enthusiasm fades sharply.

If a bubble did burst, the most obvious effect would likely be volatility in companies closely linked to AI.

This might include:

• Chipmakers

• Cloud computing companies

• Data centre businesses

• Software providers.

Large technology companies also make up a significant share of many global stock market indices. So, if some of the biggest AI-linked firms fell sharply, broader markets could also be affected.

Of course, this doesn’t mean you should worry about what the future might hold, as it is nearly impossible to predict what might happen.

The effect on your portfolio would also depend on how much exposure you have to AI-linked shares, how diversified your investments are, and whether you hold other assets that may behave differently during periods of volatility.

While a diversified portfolio can’t remove risk entirely, it can reduce your reliance on one sector, geographical area, or asset class. 

Your own portfolio will be holding up to 29,000 different stocks, shares and bonds, offering you a highly diversified approach to investing. 

A long-term plan can help you avoid reacting to short-term noise

AI-linked stocks may remain an important investment for many years, and they may experience further setbacks or corrections along the way.

This is why it’s important not to build your financial decisions around headlines alone.

Your portfolio should ideally reflect your goals, attitude to risk, and investment time frame. It shouldn’t depend on predicting whether one sector will continue to dominate.

Rather than trying to predict whether an AI bubble will burst, it may be more useful to focus on the factors you can control. 

These include: 

• Diversification

• Risk management

• Tax efficiency

• Regular reviews where you focus on your goals and objectives.

Keeping recent events in perspective and staying focused on your long-term plan could ultimately give you a better chance of navigating volatility with confidence.

Get in touch

We could help you remain focused on your long-term plans and ensure you maintain a well-diversified portfolio.

To find out more, email info@athertonyork.co.uk or call us on 0208 882 2979.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. 

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.