‘Plenty more pain ahead’: Is the AI bubble bursting?
Global markets are turning red after the blue sweep in the US midterms. Saxo Market’s Neil Wilson asks whether the time has finally come for the AI bubble to burst.
Extraordinary market action yesterday. The selling pressure that had been building in AI stocks for weeks finally blew the bloody doors off. The trigger? The Democrats’ midterm clean sweep in the US, prompting investors to reassess the scale and speed of America’s AI infrastructure buildout. The Blue Wave met a wine-dark sea, with precious little in the green.
The Nasdaq Composite plunged 5.5 per cent, its worst day since April 2025’s Liberation Day sell-off. The Nasdaq-100 sank 6.36 per cent, the S&P 500 lost 4.36 per cent and the Dow fell 3.44 per cent. Semiconductors were hammered, with STOXX down 12 per cent and Nvidia off 9 per cent, now some 25 per cent below its all-time high. Tesla and SpaceX shed 11 per cent and 9 per cent, respectively, wiping a combined $420bn from their market capitalisations in the two sessions since the election.
This was more than routine profit-taking. Citadel reported the most aggressive retail selling in the first 30 minutes of a session since April 2025, following the sixth-largest net selling day of the past year. The AI infrastructure unwind had become a broader retreat from risk.
Yet, tellingly, retail flows swung back to net buying by the close. The buy-the-dip reflex dies hard. So, was this finally the bursting of the AI bubble? We’ve long argued that if it looks like a duck, walks like a duck and quacks like one, it probably is one. But there is an important distinction from the dotcom era: these companies have real earnings. What investors are questioning is not whether AI makes money, but how sustainable current growth expectations and infrastructure spending really are.
Plenty of pain ahead
The political explanation also looks overdone. Democrats may challenge the pace of data-centre expansion, but killing the AI investment cycle would be economic madness. AI is central to America’s growth ambitions. As James Carville famously put it, “It’s the economy, stupid.” Slowing the buildout is not the same as stopping it. Indeed, a more measured pace could benefit hyperscalers struggling to justify spending ahead of cash flows, while making demand more sustainable for the picks-and-shovels businesses supplying the infrastructure.
Valuations have already taken a remarkable hit. The Nasdaq-100 trades at around 19 times forward earnings, its lowest multiple since October 2022 and 24 per cent below January’s peak. Semiconductor valuations have roughly halved from their highs, despite substantial earnings upgrades. Some of the worst-case scenario appears to be in the price. But beware the dead-cat bounce. The dotcom bust was not one crash, but a succession of spectacular rallies followed by fresh lows. The Nasdaq ultimately fell 77.9 per cent from peak to trough over 31 months. If this really is a bubble bursting, there could be plenty more pain ahead.
Our suspicion, though, is that this is different. The hype is fading, expectations are being reset and valuations are normalising. That is painful, but it doesn’t necessarily mean the AI revolution is over. Perhaps we’re witnessing the bubble deflating, rather than bursting.
Neil Wilson is a UK investor strategist at Saxo Markets.