The AI Bubble Debate Is Asking the Wrong Question

Salutations, Olio aficionados! 👋

Welcome to the 264th edition of Weekly Olio. We’re thrilled to introduce a fresh new twist to your Sundays: Publisher Parmesan, our hand-picked, thoughtfully crafted edition designed to spark inspiration and insights for the week ahead.

It’s the perfect way to unwind, recharge, and prepare for the week with something truly worth savoring.

If you’re new here and you’re looking for more long-form, crispy writing, click the link to subscribe under this GIF 👇

Did you recently see an ad for Roku Ads Manager in a newsletter? We’re running a short brand lift survey to understand what’s actually breaking through (and what’s not).

It takes about 20 seconds, the questions are super easy, and your feedback directly helps us improve how we show up in the newsletters you read and love.

If you’ve got a few moments, we’d really appreciate your insight.

Take the survey.

Every major market cycle produces a familiar argument.

"This time is different."

We've heard it during railroads, radio, the Nifty Fifty, the dot-com boom, housing, crypto, and now artificial intelligence.

Today's version sounds convincing. Unlike the late 1990s, the companies at the center of the AI boom are enormously profitable. Nvidia generates billions in earnings. Microsoft, Amazon, and Alphabet produce cash flows that the internet darlings of 1999 could only dream about.

On the surface, that seems to settle the debate. After all, how can this be a bubble if the underlying companies are actually making money?

The problem is that bubbles rarely announce themselves through obviously irrational valuations. More often, they emerge when investors begin treating current conditions as permanent.

And that is where the AI story becomes far more interesting. Because the most important question today may not be whether AI companies are profitable. It may be whether those profits are as durable and organic as investors believe.

Every generation believes it has discovered the exception to history. The argument today is straightforward.

The dot-com bubble was built on dreams. Today's AI leaders are built on earnings.

Back in 1999, investors poured money into companies with little revenue and even less profit. Pets.com became a symbol of the era because it represented the excesses of speculation.

Today's market looks very different. Nvidia's revenue growth is real. Cloud spending is real. Enterprise AI adoption is real.

The largest technology companies are not speculative ventures. They are some of the most profitable businesses ever created.

Which is why many investors dismiss comparisons to the late 1990s altogether. But history has a habit of being remembered selectively.

One of the most common misconceptions about the dot-com boom is that nobody was making money. That simply isn't true.

Companies like Cisco, Lucent Technologies, and other infrastructure providers generated substantial profits during the buildout of the internet. The technology sector's earnings growth during parts of the late 1990s was remarkably strong.

What ultimately failed wasn't the technology. The internet transformed the world.

What failed was the assumption that every company benefiting from the boom deserved its valuation. The distinction matters.

A technological revolution can be real while investor expectations become detached from reality. Those two things often happen together.

The internet was real. The railroad revolution was real. The housing boom was real. Reality does not prevent bubbles. Sometimes it enables them.

The most interesting part of the current AI debate has little to do with technology. It has to do with government spending.

For much of modern economic history, large government deficits have acted as an invisible support mechanism for corporate profits. When governments spend aggressively, money ultimately flows through the private sector.

Today, the United States is running budget deficits that would historically be associated with recessions or crises. Yet the economy remains relatively strong. The implication is significant.

A portion of today's corporate profitability may not be purely market-driven. It may be supported by extraordinary fiscal stimulus operating in the background.

Think of it as a transfer mechanism. Government spending enters the economy. Businesses capture part of that spending. Corporate profits rise. Investors reward those profits with higher valuations. This doesn't mean the profits are fake.

But it does raise a question. What happens if that support weakens?

The biggest difference between today's AI boom and the dot-com era isn't profitability. It's the existence of modern private capital.

In the late 1990s, startups had very few options. If they wanted significant funding, they eventually had to access public markets. Investors could see them, evaluate them, and price them.

Today's ecosystem operates differently.

Companies can remain private for much longer periods while raising enormous sums of money. Consider companies like OpenAI, Anthropic, and SpaceX.

They have absorbed billions of dollars in private funding before reaching public markets. This changes market psychology. Risk remains hidden longer. Valuation discovery occurs behind closed doors.

Loss-making companies can sustain themselves for years without facing the scrutiny of public investors. The consequence is that today's market may appear healthier than previous bubbles simply because much of the speculation remains invisible.

61% of marketers say this is the biggest marketing shift in decades.

Get the data and trends shaping growth in 2026 with this groundbreaking state of marketing report.

Inside you’ll discover:

Download your 2026 state of marketing report today.

Get Your Report

Investors spend enormous amounts of time trying to predict when bubbles burst. History offers a surprisingly consistent answer. Higher interest rates.

Across centuries of financial history, nearly every major speculative cycle has ended when liquidity becomes more expensive.

Railroads. Real estate. Technology. The pattern repeats.

Cheap money fuels risk-taking. Expensive money exposes weaknesses.

What's particularly fascinating about today's environment is how sensitive markets have become to bond yields.

Every time the U.S. 10-year Treasury approaches 5%, markets react nervously. Investors instinctively understand what higher rates imply: future earnings become worth less, borrowing becomes more expensive, and speculative capital becomes harder to access.

This is why interest rates matter far more than any individual AI breakthrough.

A better model might add value. Higher rates can remove liquidity from the entire system.

One mistake investors often make is confusing market concentration with market risk. Many critics point to Nvidia's valuation and conclude that it represents evidence of a bubble. But Nvidia's valuation metrics are not particularly extreme relative to its growth rate. The more interesting concern lies elsewhere.

If earnings themselves are being supported by unusually favorable conditions—government deficits, massive capital inflows, and unprecedented AI spending—then traditional valuation measures become less reliable.

In other words, the risk may not be that stocks are expensive relative to earnings. The risk may be that earnings themselves are unusually elevated. That is a far subtler problem. And far harder for investors to recognize.

One of the most revealing aspects of the current market is what experienced investors are actually doing.

Most are not fleeing. They are staying invested. The reason is simple. Bubbles can persist far longer than logic suggests.

Even investors who believe valuations are becoming stretched often acknowledge that momentum can continue for years. Predicting the end of a cycle is extraordinarily difficult.

As the old saying goes, markets can remain irrational longer than investors can remain solvent. That reality forces a more nuanced approach. Rather than abandoning markets entirely, sophisticated investors look elsewhere for opportunity.

And increasingly, that means looking beyond the crowded AI trade.

One of the most powerful observations in investing is that markets tend to overprice excitement and underprice indifference.

Today, capital is pouring into a relatively small group of AI beneficiaries.

At the same time, many high-quality businesses around the world are being ignored simply because they do not fit the dominant narrative.

This creates an interesting asymmetry.

The most loved companies often carry the highest expectations. The most ignored companies often carry the lowest expectations. And investing, at its core, is a game of expectations.

As one investor famously put it, the opposite of love is not hate. It's indifference.

The greatest opportunities often emerge not from buying what everyone loves or shorting what everyone hates, but from owning what nobody is paying attention to.

The AI boom is real. The technological progress is real. The profits are real.

But those facts alone do not answer the question investors should be asking.

The real question is whether the conditions supporting those profits are permanent.

History suggests they rarely are.

That doesn't mean the AI era ends badly. The internet revolution created enormous wealth despite the crash that accompanied it. The same may prove true for artificial intelligence.

But every cycle teaches the same lesson.

Technology can change the world.

That doesn't mean every investment made in its name will be a good one.

The investors who succeed are rarely those who predict the future perfectly.

They are the ones who understand which assumptions the market has stopped questioning.

Interested in learning more about AI? Check out our previous coverage here:

Don't wait. Sign up for The Hustle to unlock our side hustle database. Unlike generic "start a blog" advice, we've curated 100 actual business ideas with real earning potential, startup costs, and time requirements. Join 1.5M professionals getting smarter about business daily and launch your next money-making venture.

Get the guide

That’s all for this week. If you enjoyed this edition, we’d really appreciate if you shared it with a friend, family member or colleague.

We’ll be back in your inbox 2 PM IST next Sunday. Till then, have a productive week!

Peeyush and Mohit

Disclaimer: The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group or individual.