Economist Warns One AI Bubble Has Burst, While a Second ‘Rare’ Bubble Continues to Expand

(SeaPRwire) –   The AI stock bubble, which saw intense debate throughout the latter half of 2025, has already deflated. This is the assessment of John Higgins, chief markets economist at Capital Economics, who is now more concerned about the risks currently developing.

A bubble is typically defined by asset valuations that far exceed their intrinsic value, a phenomenon usually observed when share prices climb despite a lack of strong financial performance. “If you’re judging whether a bubble exists or not in relation to how stretched or otherwise its valuation is, then there’s an argument that the bubble has burst,” Higgins told .

In a client note released this week, Higgins observed that for the IT sector and Big Tech, the ratio of share price to earnings per share had climbed over recent years, signaling inflated valuations. However, as of October 2025, that price-earnings ratio declined to its lowest point since the pandemic. Higgins noted that the dotcom bubble of the early 2000s followed a similar trajectory, though with much higher ratios, exceeding 150% for the IT sector compared to a peak of nearly 75% in late 2024.

AI valuations have indeed surged. Data from the tech intelligence firm CB Insights shows that as of fall 2025, there were 498 AI unicorns with a combined value of $2.7 trillion, with 100 of those founded in 2023 or later. Over 1,300 AI startups are valued at more than $100 million. According to CFO Sarah Friar, OpenAI’s valuation hit $730 billion last month, up from $500 billion just six months prior.

Nevertheless, the tech sector has experienced a correction, partly due to the “SaaSpocalypse”—a sharp selloff of software-as-a-service (SaaS) stocks driven by investor fears that agentic AI could easily disrupt traditional software business models. Both ServiceNow and Salesforce have seen their values drop by roughly 30% year-to-date.

“Investors had sort of honed in on that software services industry group as being one of those sectors that was relatively vulnerable to that rollout of AI,” Higgins explained. “And therefore we had a big paring back in the valuation of that sector in particular.”

Higgins noted that the impact extends beyond the SaaS industry. The semiconductor sector has also faced a slowdown, hampered by high demand causing chip shortages, alongside supply chain disruptions stemming from geopolitical tensions, such as the war in Iran and new tariffs.

AI’s next bubble is a rare one

According to Higgins, another bubble may be concealed within the challenges facing these industries. Tech earnings have skyrocketed recently, raising questions about the sustainability of such growth. Bloomberg Intelligence projects earnings growth for the Magnificent Seven at approximately 18%, compared to 11% for the remaining 493 S&P 500 companies. Last month, Nvidia reported $68.1 billion in fourth-quarter revenue, a 73% year-over-year jump.

“There may be one [bubble] actually in the fundamental side of things, which is quite rare,” Higgins said. “Normally we think of a bubble as being something where the price has gotten out of whack with the fundamentals themselves…In this case, the bubble actually may be in the earnings themselves.” By this, Higgins refers to the primary argument used by tech optimists: the massive profits generated by the dominant Magnificent Seven firms. Essentially, he is questioning what might happen if those profits decline.

There are several reasons why AI earnings could soon hit a wall, leading to a market correction. Higgins pointed out that AI demand might be lower than expected, forcing tech firms to grapple with an estimated $539 billion in AI capital expenditure for 2026, according to Goldman Sachs. While McKinsey reports that 88% of companies use AI regularly, adoption may be stalling due to employee concerns regarding job displacement.

Higgins suggested that a greater threat to AI earnings lies in the precarious state of the economy. The ongoing war in Iran has disrupted helium production in Qatar, which accounts for roughly one-third of the global supply of the gas essential for chip manufacturing. Furthermore, data centers have become targets during the conflict, and rising energy costs could increase operational expenses for these facilities.

“If the economy, more generally, were to weaken, that could also weigh on the stock market and weigh on the earnings of companies who are making money from the rollout of AI,” Higgins said, “even if demand for AI itself isn’t really weakening much.”