AI Bubble Alert: Risks and Smarter Bets for Investors

Investors face a tough call on AI stocks right now. Some see clear bubble signs in sky-high valuations and hype, while others point to real growth ahead. Fears spiked after Nvidia’s latest earnings—strong numbers, but the stock dropped on bubble worries. Here’s the split, straight from recent reports, and what it means for your money.

The Bear Case: Overvalued and Risky

GMO, the firm run by Jeremy Grantham, calls AI a “classic investment bubble.” Ben Inker, their co-head of asset allocation, points to rampant speculation—like quantum computing stocks jumping 1200% in a year, making even Palantir look cheap. He compares it to the dot-com era. Check GMO’s full letter here.

Oracle stands out as especially vulnerable. The company carries $91 billion in debt and $14 billion in operating leases as of August 31. Interest payments hit $923 million last quarter alone—over 20% of operating income. They’re issuing $18 billion in bonds, some maturing in 40 years, to fund deals like a reported $300 billion pact with OpenAI. Free cash flow is negative, and AI infrastructure margins might hit just 30-40%, far below software norms. If OpenAI stumbles—say, from funding needs estimated at $207 billion through 2030 or lost edge to rivals—Oracle could end up with unused data centers. Motley Fool breaks it down.

The economy feels the heat too. JPMorgan Asset Management says AI spending drove two-thirds of U.S. GDP growth in the first half of 2025, outpacing consumer spending. A bust could tip us into recession, as David Sacks warned on X. Bloomberg notes fears hitting utilities. ABC News covers the debate.

The Bull Case: Early Days, Big Payoff

Not everyone’s running scared. Wedbush’s Dan Ives says AI fears are “way overstated”—Nvidia’s report shows we’re just in the “top of the 3rd inning.” Ten tech giants like Nvidia, Amazon, and Microsoft make up 40% of the S&P 500, but bulls argue AI differs from dot-com flops. These firms have solid models and paths to profit, unlike many internet also-rans. CNN rounds up the optimists.

Lightspeed’s Ravi Mhatre backs Anthropic and sees revenue growth exploding faster than past tech waves. New uses keep emerging in cloud, coding, ads, and consumer tools like ChatGPT shopping aids. JP Morgan’s Bob Michele adds: no bubble yet, unlike dot-com. Seeking Alpha sees pullbacks as buys.

Where to Put Your Money

If you’re wary of AI darlings, GMO suggests tilting away without going all-cash. Go for:

Developed market value stocks
Non-U.S. small-cap value, especially Japan

ETFs like Avantis International Small Cap Value (AVDV) or iShares MSCI Intl Value Factor (IVLU) give exposure. Inker says these trade at fair prices, with no long-term return hit even if AI’s legit.

Bottom line: Watch debt loads, valuations, and profit timelines. AI could reshape everything—or pop hard. Diversify beyond the hype.