You're either in one camp or the other as 2025 comes to a close: you think AI is a bubble or that AI is not a bubble.
But for those wondering where they stand, there's nuance in the debate to be aware of, specifically, what kind of bubble might AI be?
Well, there are two kinds, according to a portfolio manager at $35 billion Gabelli Funds. John Belton says stock market bubbles are either earnings-driven or valuation-driven.
Like many finance pros, he compared the current AI landscape to the dot-com era, noting that prices for top tech stocks today are high relative to profits but not overly so. For that reason, he maintains that the AI market likely hasn't entered a valuation bubble.
"It is very difficult to argue we are in a valuation bubble currently. As an example, median 'Mag 7' (seven largest tech co's) forward P/E was close to 90x at YE99 vs. ~25x today," he said. "Valuations seem to simply reflect strong fundamentals without obvious excess. Are we in an earnings bubble? Time will tell."
The portfolio manager shared two reasons he doesn't think AI has fallen into an earnings bubble at present, though. The biggest reason is that while AI capex spending is high, the bulk of it is being used to strengthen already-profitable businesses.
The second is that the list of use cases for AI is growing.
"Second biggest reason to feel confident we are not in an earnings bubble: additional large-scale use cases are beginning to present themselves. Autonomous driving, robotics, life sciences, other scientific discovery, agentic software. We do need at least some of these use cases to become commercial — early, but there is promise."
Belton pointed to concerns surrounding Oracle and Broadcom, which have both seen recent declines as investors question high capex spending and returns on AI investments. However, Belton added that he thinks both stocks have the potential to shake off the current volatility, and that Broadcom is among the top chip stocks to own right now.
The portfolio manager is bullish on the AI trade's continued strength in the near term, but said investors are right to be cautious about massive spending from OpenAI.
"Like any infrastructure cycle this too will be a cycle (question is not if we reach a peak, but when and how high the peak is)," he said.
