Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 675

Can you ride the AI bubble without overpaying?

The trillion-dollar gamble

Every market cycle has its defining narrative. In the late 1990s it was the internet. Before the Global Financial Crisis, it was structured credit. Today, it is artificial intelligence.

The challenge for investors is that the most dangerous investment bubbles are rarely built on fiction. They are usually built on powerful truths taken to excess. The internet transformed the global economy; credit expanded growth and consumption. Artificial intelligence will almost certainly reshape productivity, business models and economic output.

The question is not whether AI matters; it clearly does. The question is whether markets have become too optimistic about the returns that will ultimately flow from the enormous capital being deployed.

There are reasons for caution.

A familiar warning signal

Historically, major market peaks have often been characterised by a shift from companies buying-back their own shares to issuing new equity. When management teams decide it is attractive to sell stock to investors rather than repurchase it, it can be a powerful signal that valuations have become stretched. We saw this during the technology boom of 1999 and 2000 and again during parts of the post-pandemic investment frenzy. There are now early signs that this pattern is beginning to re-emerge among some of the largest technology companies.

At the same time, the scale of investment flowing into AI infrastructure is extraordinary. What began as hundreds of billions of dollars of annual spending is rapidly moving towards a potential trillion-dollar run rate. Technology companies are caught in a strategic arms race. Underinvest and risk irrelevance; overinvest and risk destroying shareholder value.

No executive wants to be remembered as the leader who missed the most important technological shift of a generation. Yet investors should not assume every dollar committed to data centres, semiconductor capacity and energy infrastructure will ultimately earn acceptable returns.

This is the critical distinction often lost in today's market enthusiasm. AI can be transformative for the economy while still producing disappointing outcomes for investors who pay too much for exposure.

Beyond Silicon Valley

The AI investment cycle is also far broader than many appreciate. Most attention remains focused on software businesses and semiconductor manufacturers, but the beneficiaries extend throughout the economy. Building the next generation of AI infrastructure requires enormous quantities of steel, copper, power generation, electricity networks and construction capacity.

The winners are not confined to Silicon Valley. They include industrial companies, commodity producers, infrastructure owners and energy providers across public and private markets.

To put this in perspective, the Sydney Harbour Bridge contains approximately 52,800 tonnes of steel and a one-gigawatt data centre contains over 200,000 tonnes of steel, Anthropic alone recently announced it was interested in 1.4 gigawatts of data centre capacity in Australia.

Risks extend into the broader economy

The opportunity is significant, but so is the risk.

The interconnected nature of this investment theme means a disappointment in the AI cycle could reverberate well beyond technology stocks. If returns fail to justify the unprecedented capital expenditure currently underway, the consequences could be felt across infrastructure, private markets, industrials, energy and credit. Investors increasingly view AI as a technology story. In reality, it has become an economy-wide investment phenomenon.

Importantly, this does not mean the broader economy is approaching recession. The United States remains remarkably resilient. AI investment is supporting employment, construction activity and productivity growth. Labour markets remain strong, and inflation pressures remain persistent. In such an environment, central banks have little reason to aggressively cut interest rates. A healthy economy and a vulnerable share market are not mutually exclusive outcomes.

Indeed, one of the more plausible scenarios for investors is that economic growth remains reasonably strong while equity valuations come under pressure. Markets and economies do not always move together. The real economy may continue benefiting from AI-driven productivity gains even as investors reassess the prices they are willing to pay for future earnings.

The difficulty of diversification

Adding to the challenge is the declining effectiveness of traditional diversification. Correlations between asset classes have become less stable, making portfolio construction increasingly difficult. Government bonds have not always provided the protection investors once expected, while alternative assets face capacity constraints and accessibility challenges. The old playbook of simply allocating across shares and bonds may no longer offer the same level of resilience.

For Australian investors, the backdrop is even more complex. Domestic growth is slowing, household budgets remain under pressure and fiscal flexibility is increasingly constrained. Meanwhile, global divergence is widening. The United States continues to outperform, Europe remains sluggish and China faces deep structural challenges.

The lesson investors keep forgetting 

Against this backdrop, investors should resist the temptation to choose between blind optimism and outright pessimism. The AI revolution is real. The productivity gains could be profound. But every great technological transformation attracts excessive capital at some stage of the cycle.

The lesson from history is not that innovation fails. It is that investors often overpay for it.

The winners over the next decade will not be those who ignore artificial intelligence, nor those who chase every AI-related investment. They will be those who recognise that extraordinary opportunities and extraordinary risks often emerge together. The future may be bright, but even the brightest future can become overpriced.

 

Michael Turner is a Director, Principal, and Investment Advisor at Hamilton Wealth Partners. This article contains general financial information only. It has been prepared without taking into account your personal objectives, financial situation or particular needs.

 

  •   12 August 2026
  • 1
  •      
  •   

RELATED ARTICLES

Datacenters are the new shale oil

Simple maths says the AI investment boom ends badly

Have AI’s four horsemen arrived?

banner

Most viewed in recent weeks

Are you making these SMSF mistakes?

After four decades advising investors, there are a few common mistakes I've seen SMSF investors make. From holding too much cash and chasing yield to overtrading and trusting tips. Are these errors costing you?

Why have Australian living standards 'fallen' and how do we fix it?

For the last few years there has been much talk of a 'cost-of-living' crisis in Australia and of 'falling living standards'. Lately this has flared up again with the pickup in inflation resulting in a renewed fall in real wages.

Will you run out of money in retirement?

Fear of running out has become a defining retirement anxiety. Why do some retirees die with substantial wealth while others deplete their nest egg? Evidence suggests the answer is more complicated than we think. 

Four options for an income investor’s next dollar

What if Australia’s golden age of dividends is ending? Rather than overhaul your portfolio, it may be worth considering where new capital can work harder. I discuss four income strategies and the trade-offs behind each.

Retirement spending is not one-size-fits-all

New data challenges the idea that Australians are underspending their super. The bigger issue may be helping retirees navigate complexity, make confident decisions and use their savings to support security, wellbeing and choice.

The missing link in the CGT debate

A little-noticed consequence of Labor’s tax changes could have implications well beyond investors’ tax bills. The issue raises bigger questions about incentives, capital allocation and the drivers of long-term economic growth.

Latest Updates

SMSF strategies

Meg on SMSFs: What do we think about reversionary pensions these days?

Reversionary pensions have long been a staple of SMSF estate planning, but are they still the best option? Meg Heffron revisits a once-clear favourite and asks whether changing super rules have shifted the balance.

The ageing ‘crisis’ has not and will not happen

Rising age dependency is frequently treated as a warning sign for economies. But when actual workforce participation is examined, a strikingly different picture emerges about ageing, productivity and economic sustainability.

Retirement

How does the 4% rule stack up?

The 4% rule has long been retirement's gold standard. But after a difficult period for investors, fresh analysis suggests a more conservative approach may significantly improve the chances of making savings last.

Shares

Four charts that expose market concentration risk

Investors have recently been rewarded for backing market leaders, but history suggests this eventually comes at a cost. Now may be the time to review whether your portfolio is carrying unintended risks beneath the surface.

Investment strategies

The case for gearing beyond property

Most Australians gear into property but ignore shares. That may be a mistake. Used carefully, geared equity strategies can enhance long-term returns, reduce cash tied up in growth assets and support retirement income goals.

Economy

Australia's $1 trillion debt pile

The headlines exclaiming that Australian government debt has hit A$1 trillion and US government debt has hit $40 trillion has turned heads, but how serious are they really? Will Australia's mix of debt create challenges?

Economy

Has 100 years of growth made us any happier?

For decades, GDP has been the benchmark for economic success, but has it made us materially happier? If happiness does not rise in lockstep with prosperity, are we overlooking what constitutes a successful society?

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.