Are we in a stock market bubble?

Bubbles usually sound like a good time – except when you’re an investor. Whether you’re talking about the Dutch Tulip mania of the 1630s, Beanie Babies in the late 90s, or the housing market circa 2008, when asset bubbles pop, investors can get hurt.

Are we currently in a stock market bubble? It's a question investors are increasingly asking. Before we try to answer it, let’s level-set on what a stock market bubble actually is.

What is a stock market bubble?

As we’ve often said, what separates stocks from speculative investments like gold (or Beanie Babies, for that matter) is that there are assets of real value behind them. Companies may have product pipelines, real estate, machinery and income streams, for example. Speculative investments don’t have any of that – their value is primarily whatever someone is willing to pay at that moment.

If we could see the future, stocks would probably be priced to reflect exactly what they’re worth, based on tangible, calculable drivers of value.

But that’s not the reality we live in. In a bubble, prices grow much faster than fundamental value, and when investors collectively realize that the emperor has no clothes, they start selling, the bubble pops and prices crash back to earth.

What’s key is that while the bubble is growing, investors always believe there are justified reasons for the inflated prices, and they expect their investments to pay off. The eventual crash is what, in hindsight, determines a bubble. Big bets that pay off look like genius investments. Those that don’t are bubbles.

Is the stock market overvalued today?

The stock market has reached a series of new highs in 2026, despite periods of volatility along the way. Strong corporate earnings, continued economic growth, and enthusiasm surrounding artificial intelligence have helped fuel investor optimism.

But it's made some investors wonder whether prices have risen too far, too fast. Earlier this year, the darlings of the last few years’ stock returns – the “Magnificent 7,” or seven of the largest U.S. companies, most of which are in the technology sector—began to wobble. And since the Magnificent 7 make up a third of the S&P 500’s capitalization (or total value), their performance has a large impact on the overall market.

So, 2026’s periodic losses might have felt worse than they really were, historically speaking. The markets have been exceptionally strong coming out of the downturn in 2022. (Remember that? As humans, we tend to have short memories and need to watch out that our expectations don’t start defaulting to permanent growth.)

The S&P 500 has wobbled at times this year, but remains well above the previous bear market

S&P 500 closing price. Source: S&P Dow Jones Indices, December 31, 2021, through August 7, 2026.

Some investors have also started to question these stocks’ valuation. Valuation measures help investors compare stock prices with the earnings, revenues or assets supporting them. For example, the price/earnings or P/E ratio tells you how much you’d pay for a stock divided by how much it’s paying in earnings. A high P/E ratio means a higher price per dollar of earnings.

When valuations become significantly higher than historical averages, some investors interpret that as a warning sign. However, high valuations alone don’t necessarily mean a crash is imminent. Markets can remain expensive for years if companies continue delivering strong earnings growth.

To know whether we're in a bubble, the question isn’t whether the market is expensive today (it is, with P/E ratios above average), but whether future earnings will end up justifying current prices. That's where much of today's debate centers, particularly around artificial intelligence.

Are we in an AI bubble?

Why AI stocks have surged, then fallen

AI investors aren't simply evaluating what these companies earn today. They’re trying to estimate how widely AI will be adopted, how quickly businesses will integrate it into their operations and how much profit those capabilities could ultimately generate.

That’s difficult to say right now. We’re in relatively uncharted territory, and new information can dramatically change expectations. A breakthrough technology announcement or evidence of stronger adoption can send stocks higher; signs of slowing demand or rising costs can do the opposite.

Given all the uncertainty, AI-related stocks have experienced periods of both extraordinary gains and notable pullbacks.

AI infrastructure spending

Then there's the other stuff needed to support AI.

Major technology companies continue investing heavily in data centers and computing power – to the tune of hundreds of billions of dollars. Companies developing AI tools need massive resources, and cloud providers are racing to expand capacity. (Some “hyperscalers” – Amazon, Google and Microsoft – sell computing power and use it to support their own products and services, and some – Meta and Apple – are building data centers specifically for internal use.)But data centers can take years to build, meaning investors may need to wait a long time before knowing whether today's investments generate the expected returns.

Companies in the “Magnificent 7” have scaled up spending more than 3x since 2023

Quarterly trailing 12-month capital expenditures are calculated by adding capital expenditures from the statement of cash flows for the last four quarters, two semi annuals or annual. The Bloomberg Magnificent 7 Price Return Index is an equal-dollar weighted equity benchmark consisting of a fixed basket of 7 widely-traded companies classified in the United States and representing the Communications, Consumer Discretionary and Technology sectors as defined by Bloomberg Industry Classification System (BICS).

Semiconductor demand and unexpected impacts

Demand for memory chips has also surged, pushing some semiconductor companies to substantial stock market gains (several hundred percent in some cases). In turn, supply constraints have increased costs across other parts of the technology industry; for example, Apple has been forced to raise prices significantly for laptops and tablets.

That’s an important lesson to remember: Technological trends rarely create winners everywhere. Companies supplying critical infrastructure can thrive, while other companies relying on that same infrastructure can face higher costs and see profits shrink.

Looking forward

There are legitimate reasons for optimism about AI.

Hyperscalers continue reporting healthy earnings. Businesses are not only experimenting with AI but also paying for AI-powered products and services. Demand for computing infrastructure remains strong – hyperscalers can’t seem to build data centers fast enough.

And the market’s behavior isn’t all bubbly. For example, not all hyperscalers are seeing equal stock performance. In a bubble, investors often blindly go all-in on everything at once; deviations in performance suggest there’s at least some level of discernment happening.

At the same time, we see cautionary signals.

Many companies are spending substantial amounts of cash to fund AI initiatives. Some are taking on additional debt or accepting lower near-term cash flow in pursuit of future growth. Companies using AI are still learning how to deploy it effectively, and it remains unclear how much they're ultimately willing to pay for these capabilities.

Remember, it’s not all-or-nothing; AI could be enormously transformative while we still experience periods of disappointment and market volatility.

Does AI bubble = stock market crash?

It remains to be seen whether history will declare today’s market a bubble or just a really good time to be an investor. And AI outcomes won’t be the only thing driving the markets as we go into the rest of the year, either.

Here’s the good news: Corporate earnings are quite strong; unemployment is low and stable; and consumer spending is relatively healthy, which is crucial since it’s almost 70% of the economy.

But there are risks, too: Conflicts in the Middle East continue, with oil prices still elevated. Inflation hasn’t gone away and now looks like it’ll require the Fed to increase interest rates, which means higher borrowing costs that tend to cool the economy. The return of tariffs keeps the future uncertain for companies here and globally, and that uncertainty can have a dampening effect on major investments.

We do have confidence that over a typical investing horizon of decades, both bonds and stocks will provide positive returns. So, staying invested is a more reliable way to keep your savings growing, rather than trying the impossible task of getting out and back in at the right times.

The difficulty of market timing: The best days in the market have often occurred very close to the worst days

Top 20 best and worst days for S&P 500 performance since 1960. Source: S&P Dow Jones Indices, as of August 7, 2026.

Turn to an advisor for help during periods of market uncertainty

Aligning investments with your long-term goals is a crucial step. The markets have been strong since the end of 2023, so you may even be ahead of your plan. If that’s the case, your financial advisor might suggest cutting back on your allocation to stocks. Why take risk that’s unnecessary to meet your goals?

If and when the stock market does fall, remember that it doesn’t automatically mean your goals are slipping out of reach. The markets don’t affect your Social Security, pensions or how much you save, and a downturn can be a great “sale” on stocks that gives you the opportunity to buy low and take advantage of future returns. Above all, remember that we build every financial plan to help you withstand a range of market environments and a multitude of potential futures. So, keep your eyes on the prize.