There's a Bubble Forming in the Stock Market, but It's Not in Artificial Intelligence (AI). History Says This Happens Next.

Key Points

• The S&P 500 keeps getting more expensive.

• Some investors think there is a bubble in AI stocks.

• Emerging technology stocks, on the other hand, look unjustifiably expensive.

• 10 stocks we like better than Oklo ›

It's been nearly three years since ChatGPT was launched, and stocks have been rallying at breakneck speed ever since.

Since the start of 2023, the S&P 500 (SNPINDEX: ^GSPC) is up a whopping 73%, and even a brief plunge on tariff concerns hasn't been able to slow it down. Paced by the so-called Magnificent Seven, the broad market index has soared as AI-driven growth has fueled stocks like Nvidia, Meta, and Microsoft.

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There is some evidence that a bubble could be forming in the S&P 500. After all, the index is unusually expensive at a price-to-earnings ratio of 28, and the CAPE ratio, which adjusts for inflation, is even more expensive. The so-called Buffett indicator, a ratio of the S&P 500's market cap to U.S. gross domestic product (GDP) is also at an all-time high.

However, the AI stocks leading this charge aren't as expensive as you might think. The chart below shows five of the leading AI stocks.

NVDA PE Ratio data by YCharts

Although none of those stocks are cheap, they are mostly in line with the S&P 500, and all are delivering double-digit percentage growth. Nvidia, which is the most expensive of the group, is also the fastest growing, and its revenue is forecast to grow by 56% in its next quarterly report.

Image source: Getty Images.

Where the bubble is forming

Rather than in large-cap stocks, the bubble forming in the stock market appears to be happening in zero-revenue, emerging technology stocks, and it's reminiscent of earlier stock market bubbles.

For example, in the dot-com era, droves of small internet companies went public with little or no revenue and unproven business models. That helped hasten the bust in 2000.

During the pandemic era, we saw a similar phenomenon with special purpose acquisition companies (SPACs), nearly all of which crashed or went bankrupt, even though they generally had successful debuts.

Other emerging technology stocks with little revenue, like electric vehicles, mostly went bankrupt or crashed in that era. Even the higher-profile newcomers like Rivian and Lucid lost more than 90% of their value.

This time around, there are a number of emerging sectors that are demonstrating similar trends. For example, modular nuclear reactor company Oklo (NYSE: OKLO) has jumped 1,200% during the past year even though the company has no revenue and doesn't expect to generate revenue until at least late 2027. It is currently attempting to get a license from the Nuclear Regulatory Commission, and has not sold a purchase agreement yet. Oklo currently has a market cap of almost $17 billion.

Electric vertical takeoff and landing vehicles are another sector that has gotten frothy despite minimal revenue. Archer Aviation (NYSE: ACHR), which also has no revenue, currently trades at a market cap of $6 billion.

Finally, quantum computing stocks have soared this year, even though that sector is still producing little or no revenue. One stock, Quantum Computing (NASDAQ: QUBT), is up nearly 3,000% during the past year and its market cap has reached $3.7 billion, though it expects to generate less than $1 million in revenue this year.

What it means for investors

Investor enthusiasm for AI stocks seems to have carried over to emerging technology sectors that are unproven, much as it did in the dot-com era and during the pandemic.

Although companies like Oklo and Archer Aviation have potential, their current valuations don't seem to factor in the downside risk in the stock. It's likely to take years to build significant revenue, and even if they get there, that's not a guarantee of success.

In the current stock market, any of these stocks could crash if investor sentiment starts to shift. For the businesses to grow into their valuations without a major pullback seems unlikely.

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Jeremy Bowman has positions in Meta Platforms and Nvidia. The Motley Fool has positions in and recommends Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.