Stock market returns, globally, have been impressive this year. The returns from MSCI World Index till November this year was 21.19 percent. Returns from the tech-dominated Nasdaq, up to early December, stood at 22 percent. Major part of the returns has come from AI-linked stocks. Nearly 75 percent of S&P 500’s return in 2025, up to early December, has come from AI-linked stocks. Clearly, there is an AI boom in the market. The concern is whether this AI boom will become a bubble and burst, impacting stock markets globally.
The launch of Open AI’s ChatGPT in November 2022 was a transformative event which will have far reaching consequences. ChatGPT became the fastest growing consumer app in history reaching 100 million users within months. This has triggered a race among tech giants looking to benefit from the widespread use of AI. Investors looking for gains from the AI bonanza have been madly buying AI stocks pushing up their stock prices. Comparisons are drawn to the tech bubble of the late 1990s and its burst in 2000 impacting stock markets globally and pushing the global economy into recession. Will history repeat?
Going by traditional norms of valuations like the PE (price to earnings) ratio, AI stock prices are not in bubble territory. At the peak of the 2000 tech boom the Nasdaq PE was around 90. Most internet companies were making losses but had unjustifiably high prices. Many stocks were trading at PE ratios of above 150: clearly bubble valuations. In contrast, the present valuations of AI stocks are not excessive, though high. For instance, in early December 2025 the chip leader Nvidia is trading at a PE of 46.
The PE ratios of the large AI players in early December are as follows: Microsoft 35, Apple 37, Amazon 32, Alphabet 32 and Meta 29. These are not bubble valuations. Also, these are cash-rich companies.
However, the concern is that these tech giants and some other AI companies are making huge investments based on hope and these investments may not generate returns to justify the high valuations of stocks. The hope may end in despair resulting in crash in stock prices. This is the concern.
A recent Bank of America survey indicated that 45 percent of global fund managers believed that the biggest risk to global markets in 2026 is a bubble burst in AI stocks. A correction in AI stocks is a high probability event in 2026. If this is a major crash led by a crash in the US stock market, all stock markets will be impacted globally. But a major crash is unlikely, since big buying will emerge at lower levels. If it is a correction in AI stocks, say by 10 percent, that would be a positive for markets like India. India is widely regarded as an ‘AI loser’ unlike the US, China, Taiwan and South Korea which are regarded as ‘AI gainers’.
India couldn’t participate in the AI trade in 2025 since we don’t have any significant AI stocks. FIIs (foreign financial institutions) sold heavily in India in 2025 and moved this money for the AI trade which fetched them good returns. A likely scenario in 2026 is a correction in AI stocks and FIIs turning buyers in India. India’s GDP growth has rebounded impressively with 8.2% growth in the second quarter of 2025-26. Corporate earnings have the potential to rise by 15 percent in 2026-27. Robust economic growth and improving corporate earnings in India along with a correction in AI trade can facilitate the reversal of FII outflows and decent returns from the market in 2026.
(VK Vijaykumar is Chief Investment Strategist at Geojit Financial Services.)
{Disclaimer: This content is meant to share general information and does not constitute financial advice.)
