Littlejohn: Are we in a stock market bubble?

The investment question of the year for 2025: “Are we in an AI-driven stock market bubble?”  

It seems that in the fall of 2025, you haven’t been able to go anywhere without that question being asked. So, let’s analyze this: Are we in a bubble? And if so, what should investors do? 

The stock market is booming. Or at least the “Magnificent Seven” dominant stocks are: Alphabet (which owns Google) Amazon, Apple, Meta (Facebook), Microsoft, Nvidia (dominant maker of chips used in artificial intelligence), and Tesla have been on a tear for a while. And because of their massive position in the U.S. stock market (Together, these seven stocks make up more than 35% of the value of the entire S&P 500 Index), they are responsible for large gains in stock portfolios. 

An AI arms race 

So, what’s going on? Artificial intelligence is supposed to be a game changer, a truly transformative technology. These dominant companies are investing heavily in an AI arms race of sorts with the goal of reaping massive profits that could await the winner(s).  

These giant firms have deep pockets, and they are willing to make unprecedented investments to gain a critical edge. I read recently that Amazon, Meta, Microsoft, Alphabet, and Oracle spent $106 billion on infrastructure in just one recent quarter. It’s estimated that $5 trillion will be spent on AI data centers by 2030 to meet the demand for AI computing. 

What if they all fail? 

This is mind-boggling and, actually, a bit scary. What if these investments go south? And I am not referring to Mexico! Because of the dominant position of these so-called Magnificent Seven firms, if they falter, how will this affect the many millions of investors who own shares of them directly and indirectly through mutual funds and ETFs? 

Comparisons have been made to the dot-com bubble of the late 1990s-2000 and to the housing bubble, which led to the global financial crisis, which included a huge bear market and historic recession. Could it really be different this time? 

Actually, yes, it could. 

For one, these are all highly successful firms that generate enormous profits, in contrast to some of the dot-com bubble tech firms, whose stock prices were inflated by speculation and hype. Secondly, we’re already witnessing AI’s transformative power and potential. The rate of adoption for generative AI is reportedly roughly twice that of the internet’s growth. While there is certainly a boom, whether a bubble will burst, similar to the dot-com or housing bubbles, is something we’ll only find out if and when the bubble bursts. 

What should investors do? 

1. Diversify, diversify, diversify

Even if you don’t own individual shares of the Magnificent Seven, you already have some exposure to these stocks via index or broad actively managed stock funds. So, there’s no need to double up on that — unless you’re comfortable with the heightened risk. 

By owning a broad swath of investments, including stocks, bonds, and alternatives, such as real estate or precious metals, and including plenty of non-U.S. stock and bond funds, you’ll decrease your risk exposure in the event of a market crash or serious correction. 

2. Choose the right roller coaster

I liken the asset allocation process to being at an amusement park and selecting the roller coaster that suits you best. They all have ups and downs. The right choice for you is the one that has ups and downs that you can handle.  

3. Don’t panic or try to time the market 

As has been written many times, it’s much easier and more advisable to focus on time in the market rather than timing the market. To time the market successfully, you would need to know (or guess correctly) when the market’s rise will peak and when its drop will stop. Even AI isn’t THAT smart!  

In fact, I googled this, and Gemini, Google’s AI bot, advocated three actions: diversifying, avoiding market timing, and using dollar-cost averaging (investing a set amount of money at regular intervals). It’s good to know that Gemini and I are on the same page! 

So, assuming that you have chosen the right asset mix for your risk tolerance, timeline, and other personal factors, it’s best to stay buckled up and try to enjoy the ride. 

4. If you need to throttle back, do so gently 

Perhaps the market’s ongoing climb has made you a bit jittery. You can recalibrate your risk exposure thoughtfully. For example, if you are losing sleep worrying about actual or anticipated market volatility, I encourage you to consult your advisor. It’s possible that you can reduce your stock exposure by 5 to 10% without jeopardizing your long-term goals. 

These are fascinating and transformative times. Change can be disruptive. But a consistent approach to your investments can help you stay on course. 

Brian R. Littlejohn, MBA, CFP, CFA is the founder of Sherwood Wealth Management, an independent, registered investment advisor (RIA) firm. He lives in Aspen and works with clients in the Roaring Fork Valley and beyond. 

Brian R. Littlejohn, MBA, CFP®, CFA is the founder of Sherwood Wealth Management, an independent, registered investment advisor (RIA) firm that specializes in inherited wealth. He lives in Aspen and works with clients in the Roaring Fork Valley and beyond.