As a select group of AI-focused companies drive the S&P 500’s performance and shape economic growth, investors are increasingly questioning whether we are witnessing another market bubble.
The combined capital expenditure of tech giants like Meta, Amazon, Microsoft, Alphabet, and Oracle is projected to soar to over $500bn (around £375bn) in 2026, highlighting the scale of investment and the stakes involved. But what does this mean for charities with invested reserves?
Understanding bubbles
A market bubble occurs when asset prices rise far above their intrinsic value, driven more by speculation and enthusiasm rather than by fundamentals. These episodes are notoriously hard to identify in real time, but their aftermath can be dramatic, with sharp corrections and widespread contagion, impacting portfolios, funding plans and operational budgets for those charities that rely on investment returns.
Classic bubbles, including the dotcom boom of the late 1990s and the global financial crisis, continue to shape investor anxieties today.
Economist Charles Kindleberger’s framework describes five stages of a bubble:
- Displacement – innovation sparks excitement.
- Boom – optimism and credit expansion.
- Euphoria – speculation dominates and traditional metrics are ignored.
- Crisis – reality sets in and prices fall.
- Panic – confidence collapses and contagion spreads.
The psychological drivers
Bubbles are not just about excess liquidity – they are fuelled by collective psychological biases. Overconfidence leads investors to overrate their abilities, while extrapolation makes rising prices seem permanent.
Herding behaviour, fear of missing out, and confirmation bias all amplify the trend. The “greater-fool theory” prevails, with the belief that someone will always buy at a higher price.
Is AI different?
AI’s rapid ascent fits the historical pattern of bubbles, with a handful of companies accounting for a disproportionate share of market gains and commanding rich valuations.
The dramatic rise in AI-related spending, rather than just share prices, is a particular concern. The circular nature of deals between AI model makers, compute providers, and chipmakers adds complexity and risk.
However, there are distinctions from previous bubbles. Today’s leading tech firms are financially stronger, with dominant market positions and robust cash flows.
Much of the current investment is funded from these cash flows, not debt. Generative AI revenues are accelerating, and enterprise adoption is still in its early stages.
Navigating uncertainty
High valuations reflect a belief in the persistence of tech leadership, but history favours change over permanence. When companies are priced for perfection, even minor disappointments can have outsized impacts. Investors are now demanding proof that massive capital outlays will deliver returns in the near term, especially given the short useful life of cutting-edge hardware.
Distinguishing between a boom and a bubble is challenging. Fundamentals – such as cash flows, productivity gains, and profitability – must eventually justify optimism. The “grey zone” between boom and bubble is where investor exuberance makes it hard to tell if capital is building a new economy or inflating unsustainable prices.
Practical takeaways for charity investors
Volatility is normal, and sharp market falls can trigger emotional overreactions. Those with the composure to act contrarian may find opportunities during downturns. Creative destruction means some AI winners today may not survive tomorrow, but innovation will continue to drive progress.
Trying to time bubbles is rarely productive. Instead, the best defence for your charity’s portfolio is to apply a disciplined process:
- Consider different scenarios – model the potential impact of a market correction on reserves and/or grant-making capacity.
- Maintain long-term discipline – avoid being swept up by market narratives and focus on long-term objectives.
- Diversify – focus on quality assets, avoid concentration and consider hedging strategies.
- Review governance – discuss portfolio positioning with your investment manager and ensure committees understand any potential risks.
Ultimately, measured, thoughtful decisions – grounded in an understanding of investor psychology – will be essential for navigating uncertainty ahead.
Alexander Joshi, head of behavioural finance, and Olivia Lewis, director, charities and not-for-profits, Barclays Private Bank
