CIO Update: Is AI in a bubble?

45% of respondents from Bank of America's recent Global Fund Manager Survey named AI valuations as their biggest concern, and recent market volatility has brought those fears into sharper focus. Let's look past the headlines at what the data actually tells us.

What the data says

Valuations are high, but not bubble-like: The hyperscalers driving AI infrastructure – think Microsoft, Alphabet, Amazon, and Meta – average about 26 times forward earnings. That's rich by historical standards, but far from bubble territory. During the speculation-driven bubble of the dot-com boom in 1999, companies traded at 67 times PE, with a total mismatch between price and underlying earnings. Today’s market leaders – especially in AI – are much better supported by real earnings and cash flow.

Credit conditions are healthy: Bubbles typically form when cheap credit fuels speculation, but that’s not the case today. Corporations remain cash-rich, and the credit-to-GDP gap – a measure of borrowing relative to economic output, and one of our key market cycle indicators – sits at its lowest level in decades. Capital discipline today stands in sharp contrast to the easy money that inflated past bubbles.

Liquidity conditions remain supportive: With the US government shutdown resolved, liquidity from the Treasury General Account is re-entering the financial system as federal spending resumes. Additionally, the Federal Reserve has cut rates twice to 3.75-4% from over 5% at its peak, and is likely to continue easing monetary policy as inflation moderates. Taken together, these factors support the liquidity backdrop for markets. We continue to see opportunities to deploy excess cash, not retreat.

Volatility calls for perspective

AI is poised to reshape the global economy, but that transformation won't necessarily be smooth. As part of healthy market cycles, we will see periods of correction or reassessment. The fundamental drivers for AI, however, remain intact: productivity gains across sectors and a corporate willingness to invest in AI capabilities that deliver real economic value. For long-term investors, we see this as a healthy pause in a longer-term bull trend.

Ultimately, taking a long-term perspective remains the most reliable path to building wealth over time. Rather than trying to avoid volatility altogether, it's better to build a portfolio that can handle it. 

Our General Investing portfolios have this principle in mind – they’re diversified across regions, asset classes, and sectors to provide stability when any one market faces pressure. You can also pair this with a dollar-cost averaging strategy. By investing fixed amounts at regular intervals, you naturally smooth out your entry prices over time. A systematic approach, coupled with a long-term perspective, helps you stay invested through market cycles.