AI stocks have surged since November 2022, but cracks are showing. Nvidia jumped 761%, Palantir up 604%, Taiwan Semiconductor 165%, and Microsoft 88%. A gold rush, yes. But experts warn the party might not last.
Morgan Stanley’s Katy Huberty says we’re early in AI’s game with more gains ahead. But others are cautious. The hype and sky-high prices could mean a harsh correction is coming.
Here are five key risks firing warning shots for AI investors. 
1. Sky-high valuations
AI stocks trade at multiples that make even the frothiest tech craze look cheap. The iShares Future AI & Tech ETF (ARTY) sits at a 35.2 PE ratio. Nvidia’s at 45. Compare that to the S&P 500’s 23.7 PE. These gains already price in massive growth. If actual earnings fall short? Expect major stock pullbacks.
2. AI’s actual impact might fall short
Goldman Sachs’ Jim Covello lays it out bluntly: AI today underdelivers.
“People generally substantially overestimate what the technology is capable of today. In our experience, even basic summarization tasks often yield illegible and nonsensical results.”
“This is not a matter of just some tweaks being required here and there; despite its expensive price tag, the technology is nowhere near where it needs to be in order to be useful for even such basic tasks.”
“And I struggle to believe that the technology will ever achieve the cognitive reasoning required to substantially augment or replace human interactions.”
If AI can’t deliver broadly, those huge infrastructure investments could flop.
3. Today’s AI leaders might not stay on top
Just because a company owns the AI hype today doesn’t mean it will in five years.
Rob Arnott, Research Affiliates Founder:
“The presumption five years ago would have been that Intel would be the dominant player. Well, Intel is teetering perilously close to irrelevance, and Nvidia wasn’t on anyone’s radar screen five years ago. So disruptors get disrupted.”
Watch for new players to shake up the sector.
4. Rising long-term interest rates
Higher Treasury yields are on the rise due to debt, tariff worries, and inflation fears. Growth stocks hate this. Safer bonds lure money away. AI plays, with their lofty valuations, could take heavy hits.
5. Geopolitical chess moves
Taiwan Semiconductor is a critical AI supply chain player. China’s repeated threats against Taiwan pose a massive risk.
Author Chris Miller, “Chip War”:
“The moment conflict starts in the Taiwan Strait, you have to assume that TSMC shuts down very, very quickly regardless of what any of the players decide to do — regardless of whether anyone decides to disrupt the supply chain or destroy this or that or not.”
“Taiwan imports a big chunk of its energy and chip factories need energy. And there are a bunch of critical chemicals and materials that are imported into Taiwan, and those would stop.”
“What’s more, you couldn’t get the ships out of Taiwan if there was a shooting war going on. And so your incentive to produce a lot also declines very rapidly if you can’t actually sell chips or get them off-island.”
Geopolitical chaos could instantly freeze AI hardware production.
The AI boom has legs, but risks are piling up. Investors chasing the next big growth story should watch these red flags closely.
