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AI bubble: are we at bursting point?

Erik Britton6 November 2026|

It’s a bubble. The valuation of AI stocks implies implausible growth in future earnings, without which the capex already undertaken and planned will not deliver the returns they need. It could be rational; it could be psychological: either way, it’s a bubble. But when will it burst? That is the trillion-dollar question, and the answer might be: right now. Here, I look at some of the metrics around how likely the bubble is to burst in the next period. What can we learn from the magnitude and duration of historical upswings in the cyclically adjusted price-to-earnings ratio (CAPE) for the S&P 500, specifically? The current upswing is six months old, and only one in three previous upswings have lasted longer than that, though some have extended out to 19 or 20 months. The peak-to-trough reduction in CAPE after it tops out (the mean-reversion) depends on how far above the mean that ratio starts. Last month, CAPE was 2.3 standard deviations above its mean, a level which it occupies less than 2.5% of the time. If it bursts now (as might be happening), the peak-to-trough fall is likely to be large. If