The Rise of AI: Boom or Bubble ?

 

Artificial intelligence is no longer a distant promise—it’s shaping industries, driving record investments, and capturing the world’s imagination. From chatbots and self-driving cars to medical breakthroughs and creative tools, AI’s real-life application seems not just limitless but have also risen explosively over the years. But is this explosive rise the start of a lasting boom, or just another bubble waiting to burst?  

To understand this, we first need to grasp the concept of a bubble. What is the difference between a boom and a bubble? An economic bubble is similar to your soap bubble. When there is an increased inflow of capital into a market, it drives the price up and leads to speculative buying (buying in the hope that the price will keep rising, thus increasing gains). This speculative buying further boosts the price, causing explosive growth similar to a soap bubble, which continues to expand as more air is added. However, since this growth and price increase are not supported by real demand, the bubble eventually bursts when a large amount of capital is withdrawn from the market, exposing the lack of demand that already existed in the market but was hiding behind the explosive growth. For example, the housing bubble of the 1990s saw prices soar during its early phase, and when it burst, it triggered the 2007 financial crisis, impacting millions. A key point to note is that unsupported growth due to insufficient demand causes the bubble to collapse. In contrast, a boom involves sustained growth, supported by increased wages, consumer demand, technological innovation, etc. 

Let's understand this better with the example of why the dot-com was a bubble and not a boom. With the exponential growth of the internet and the telecommunications sector during the 1990s, the World Wide Web, e-commerce, finance, and other industries were revolutionized. So, why was it that the public saw long-term value in the internet, yet it still became a bubble? Well, as I have mentioned earlier, while explaining the economic bubble is that simple growth or long-term worth isn’t enough. The actual demand should be able to explain or justify that growth, which wasn’t true in this case. The hype that the dot-com bubble brought to, number of internet startups. There was leniency in lending to these startups, huge market capitalization, and an increase in IPOs of these firms without paying attention to their business viability, sustainability, or their revenue or profit generation; all this led to inflation of the financial bubble. Speculative buying added fuel to the fire. With prices soaring, many brought overpriced equities in the hope of increased gains. The NASDAQ index, heavily weighted with tech stocks, rose from under 1,000 to over 5,000 between 1995 and March 2000. Now the problem is that when market growth is this explosive without being backed by actual demand, when the bubble bursts, a lack of demand leads to a heavy fall in tech startup stock values, pushing many into debt. According to Goldman Sachs on October 4, 2002, the NASDAQ index fell to 1,139.90 units, a fall of 77% from its peak, as shown in the following chart. 

Now, one might ponder why an economic bubble burst. Well, the bubble starts when there is a huge inflow of capital into a market. Soon, when it becomes clear that companies are overvalued, overpriced, and that their current profits are not even near what was expected, panic takes over. This results in capital withdrawal from the market, making the bubble burst.

This leads to the question of whether AI technology is a bubble or a boom. Investment in the AI sector has skyrocketed over the past few years. As a matter of fact, in the US economy, investment in AI has contributed far more than consumer spending towards GDP growth. Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla, the Magnificent Seven, are the cause behind the majority of the growth of the S&P500, companies that have spent more than millions of US dollars in revolutionizing AI. Many experts believe that this might be why the US hasn’t fallen into recession yet. According to McKinsey's report on AI, 80 % of their respondents stated their organizations aren’t seeing a significant impact on enterprise-level EBIT from their use of gen AI. As the report states that though the use of AI and improvement in the same have been continuously rising, it is still in its early days. Nowadays, you may have noticed how almost every startup you hear about is trying to integrate AI into its business or at least marketing about integrating it. But are they actually achieving increased productivity and efficiency from it, or are they just doing it to be part of the trend? 

AI’s upward ascent reflects a pattern observed during the dot-com era, where transformative technology drove real innovation but also fueled speculative investment beyond sustainable fundamentals.  Just like during the dot-com bubble, where the companies were largely those with a “.com” domain on their internet address. A similar pattern can be noticed during the AI trend, where you may have observed many companies advertising about implementing AI into their business to keep up with the trend. As stated before, what happened during the dot-com bubble was the hype of the internet; the so-called dot-com startups got funding easily and were often overvalued. And one can't help but notice the similar pattern during the AI trend, where the AI-based startups are getting overvalued and highly speculative, and later crashing out because of a lack of a strong and viable business model.  It found that 95% of AI pilot projects failed to deliver any discernible financial savings or uplift in profits. MIT released a report stating that 95% of AI pilot projects failed to deliver any discernible financial savings or uplift in profits. And not just that, according to the report titled “The Gen AI Divide: State of AI in Business 2025,” it was found that only around 5 percent of businesses succeed at “rapid revenue acceleration,” with the vast majority falling flat.

There is no denying the fact that AI is the next best thing and does carry long-term worth. But so did the internet. After the crash of the dot-com bubble, the internet still remained a resourceful tool which have changed the world. Still, an economic bubble was formed despite its underlying value. The only difference will be the dot-com bubble, when it crashed didn’t cause a crisis, not sure if the same can be said about AI. Goldman Sachs' analysis estimates that total investments in AI will soar to almost $200 billion. With such a huge investment in AI and AI-based startups, if we are in a bubble, when it bursts, its aftermath will affect not only millions of people but also major economies of the world. Just like past innovations, real progress can coexist with speculative bubbles—where excitement drives prices far ahead of sustainable value before reality forces a correction.