Greetings & Happy Winter. We trust you and your family had a safe & wonderful holiday season.
In this note we’re going to walk thru whether there is a ‘Bubble’ in the Artificial Intelligence Economy while also sharing some thoughts about what to expect from the markets in 2026. We have been planning on sending this missive for a couple of weeks. But let’s just say we’ve been a bit distracted by the Indiana Hoosiers football team during this unprecedented run.
Over the last year or so, as the economy & stock market(s) have continued to recover from the 2022 bear market, there has been never-ending speculation about whether the whole ‘AI Revolution’ is a Bubble.
First, let’s try and define what a Bubble is. If we define ‘Bubble’ as a massive wave of investment in a new technology, or concept, that many speculate could change the course of the global economy forever…then, YES, unequivocally, there is an AI Bubble permeating the globe. We do believe we’re in an AI Bubble.
The next two questions we would like to try and answer are, Are all Bubbles historically bad? And, Will this Bubble end terribly?
Let’s back up and acknowledge most bubble talk goes back to the ‘Y2k Tech Wreck’. The internet, as we know it, essentially ‘began’ in 1995 with Netscape’s IPO. Netscape introduced the 1st internet browser, which allowed us common folk to ‘surf the web’. The internet boom was born and, for the 1st time ever, the S&P500 went up at least +20% 4 calendar years in a row from 1996-1999.
Throw in the ridiculous fear of an Armageddon-Esque computer glitch that didn’t happen (12/31/99), even though corporate America pulled forward 2-3 years of tech spending to prepare for it…along with MASSIVE spending on telecommunication as we built the ‘plumbing’ for the global internet…and you get the Y2K Tech Wreck.
The buildout of the internet was most certainly a bubble. The Nasdaq fell over 80% from the March 2000 highs thru the 2003 lows while the S&P500 fell 50%ish. The S&P500 then had its 1st ever 3 year losing streak from 2000-03. Funny how that works: when markets essentially go straight up, they tend to correct to go straight down for a short while.
There were many other issues markets were trying to discount over those 7-8 years: geopolitical risks, hanging chads, 9/11, to name a few. However, the Tech Bubble took most of the blame.
Since then, we’ve had a housing bubble, a banking-fear bubble (2008/09), a bond bubble (negative interest rates), and oil-fear bubble (oil prices were negative), a global health-fear bubble (Covid Pandemic), a seemingly never-ending political hatred bubble in this country, and now we’re arguably working thru the AI Bubble.
We would stack this AI Bubble against the internet revolution of the ‘90s & the personal computer revolution in the ‘80s. Let’s also throw electricity and railroads into the conversation. We admit the ‘value’ of those 4 incredibly life-altering revolutions seems very unequal. However, they all took massive investment, played out over decades, and changed our lives tremendously.
How else do we know AI is a Bubble? Stock market volatility. Over the last year or two, there have been many, many individual stocks that have run 200-2000%+ as this AI buildout continues to take shape. And, this past 4th quarter, most of those stocks got smashed and fell by 40-70% during a vicious pullback. The good news for most of you is that ‘AI correction’ barely affected your Funds. The Nasdaq 100 (QQQ) fell by less than 9% & the S&P500 fell by about 5%. Diversification works & not all volatility is reason to run for the hills and build a fort.
Will this bubble end terribly? Our answer is NO. We would argue none of them have. Innovation is at the heart of capitalism. Speculation, and the investment in new technologies, is part of that innovation. Speculators get hurt in ALL economic cycles and always will. But, in general, at LJI, we are not intense speculators, and we never will be. None of you likely even noticed the massive selloff in Q425 in those AI-specific stocks.
We tend to take advantage of bubbles. And fear. And greed. All 3 show up via volatility in the markets. Fear and/or greed tend to have peaks & valleys several times per year. Bubbles seem more frequent these days but also lead to some of the greatest investment opportunities we’ll ever see.
Let’s switch gears and share our annual prediction for what we expect in the markets this year. Just kidding. We’ve never once published predictions for the markets and never will. Predictions are mostly useless. And Wall Street always simply predicts the ‘trend’ to continue. We won’t waste your time as there are countless 2026 predictions out there from a lot of people who try to sell you crystal ball polish. We don’t have one of those, for the record.
Here’s what we ‘know’ about 2026: we’ll have some volatility. At least we hope we get some. Mid-term elections are this November. Since 1950 the average S&P500 pullback during mid-term years is -18%, with the smallest being -8%. Politics affect the markets in the very short-term. We look forward to whatever volatility comes our way this year. The good news is, since 1950, the average 12-month S&P500 return from that mid-term year low is +31%.
A few more thoughts. Consumer sentiment is currently at an all-time low. This market has a LOT of doubt behind it. Historically, when the Michigan Consumer Sentiment Index is extremely low, six months later stocks are higher 80% of the time. 12mos’ later they’re higher 92% of the time. Most fear is irrational and leads to higher prices. This time is likely no different.
And let’s frame the U.S. AI Investment. Right now, with just the AI data centers currently planning to be built, the estimates for the technology costs ‘inside’ the buildings will be $2 Trillion. The buildings themselves are slated to cost another $2 Trillion. That’s $4 Trillion on top of our typical economy. These #s are not bearish for the global economy. And many believe AI investment is still in the early stages. Some argue otherwise. That’s what makes markets.
We often hear concerns about stocks being ‘too high’, or crashing. The Dow was up 8 months in a row to finish 2025. That has happened 8 other times since 1927 & 7 times the market was higher 12mo later by an average of almost +13% (-10% in 1961 was lone outlier). The S&P500 has averaged a new all-time high every 3 weeks over the past 70 years. Historically, the S&P500 is UP 85% of the years that don’t have recessions. All things considered, we feel there is no imminent economic recession in the United States.
We believe in this market. We believe in the AI movement. We trust that the ‘hyper-scalers’, the companies leading the AI revolution (Microsoft, Google, Nvidia, Amazon, Facebook, etc.), are a lot smarter than we are. We are not ‘afraid’ of this market and don’t believe you should be either. There is a reason most of the global stock markets are hovering near all-time highs. Things are mostly good out there. Corporate earnings and corporate margins are near all-time highs and climbing. Geo-political risk is arguably much lower than it has been in a long time. This U.S. economy has taken a lot of hits (COVID, 10 interest rate hikes, elections, tariffs) but continues to chug along and GDP growth is accelerating. Listen to markets – they’re smart.
We appreciate the opportunity to help you. Please never hesitate to reach out with questions or concerns.
And please cheer for our Hoosiers on Monday night. We need all the good mojo we can get!
Sincerely,
Your LJI Team