If the AI bubble bursts, this is what it might look like

A stock-trading pro says watch for intense competition among AI providers, price cuts, overbuilding, and market turbulence.

The artificial-intelligence stock boom is on pause, with the red-hot semiconductor sector cooling and doubts rising about how widely AI profits will be disbursed.

Is this a bubble bursting? Nobody knows, and air has leaked out of the AI trade before, only to be followed by robust reflation. But semiconductor stock have been on such a tear—up 311% during the last three years—that it would only make sense if high-flyers such as Nvidia, Broadcom, Micron, and AMD floated back toward Earth at some point.

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What would that look like? How widespread would a selloff be? Will new public offerings—such as SpaceX’s recent debut, and Anthropic and OpenAI, coming soon— contribute to a bursting bubble? Will ordinary investors who invest in index funds get smoked, or is there someplace to hide?

I recently talked about all this and more with Dave Nadig, president of ETF.com. In a prior post, I outlined some of Nadig’s insights on the SpaceX public offering, which was controversial for a number of reasons you can read about here. Nadig also has thoughts on where AI is heading and how it might affect ordinary investors. Here’s the full interview, with a few bullet points below:

AI price cuts are coming. “I firmly believe by the end of the year, everything you think you’re paying for now will be free,” Nadig says. The competition, including AI offerings from China, will simply be too fierce for AI purveyors to charge a premium, or maybe to charge anything.

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Price cuts would cloud the profit picture. If Google, Anthropic, OpenAI, and other AI firms can’t profit on regular retail users, they’ll have to make it up through big contracts with governments and corporations. But there’s already pushback there, too.

There’s likely to be a lot of overbuilding. That’s a key lesson from the dot-com boom and bust of 25 years ago, when companies borrowed heavily to install far more fiber-optic cable than demand at the time required. The modern-day analog could be the frenzy to build data centers.

This year’s big IPOs will cause turbulence, at a minimum. The effect tends to be minor at first, because only a small portion of the company’s shares typically hit the market on the IPO date. But many more shares become available months later, when insiders are allowed to sell, and that gusher of new equity could be destabilizing. “This is volatility-enhancing,” Nadig says. “To say that has a net positive or negative effect on the price of the S&P 500 is very difficult to call.”