‘AI is real, but valuations is bubble,’ Is the rally sustainable and what happens to Indian investors if it cracks?

With Big Tech pouring in billions, Wall Street has been pricing in an AI-driven revolution over the past year. But has the AI trade run too far, too fast? While AI itself is reshaping industries, soaring stock valuations have sparked fresh bubble fears. If the rally cracks, what will be its impact and how painful will it be for Indian investors? Here's a look at it

Is AI-based investment a bubble?

Investing on based on AI potential is definately not a bubble, but “what may prove to be a bubble is the way certain AI-related stocks are being valued,” said Paresh N. Bhagat, MD & Chairperson of Mangal Keshav Financial Services.

Currently, the AI investment are being led by some of the world's strongest businesses - companies such as Microsoft, Alphabet, Amazon and Meta. These are not speculative companies chasing the next big trend. They generate billions of dollars in annual free cash flows, have exceptionally strong balance sheets and are investing because AI is already delivering measurable improvements in productivity, software development, cloud computing and enterprise adoption. Such reasons makes the current AI cycle fundamentally different from many past technology booms.

“In 2026 alone, big tech will spend close to $725 billion on AI, up from $410 billion last year, this means less free cash flow and more interest payments. Traditional cloud providers like AWS, Azure and Google Cloud are still growing 28 to 120 percent,” point out Shashank Udupa, Founder of Vayu Capital and Finance Podcaster adding that the AI theme is inevitable and it has certainly increased workflow productivity.

The problem right now is the valuations in US market

“Investors must separate the AI opportunity from AI valuations. In several pockets of the market, expectations have moved far ahead of fundamentals,” asserts Bhagat

The stock prices have, in many cases, risen much faster than the earnings they are expected to generate over the next few years. And, if a company fails to meet those high expectations, its stock can fall sharply.

Addind to that, Udupa says, “Right now everything is priced on good news. One bad news in the industry can have devastiting effects and the most affected country would be South Korea.”

How it may impact Indian investors?

If a valuation-led correction emerges globally, Indian markets are unlikely to remain immune.

As per Udapa, first, the pain arrives through FIIs, not directly. We already saw over ₹2 lakh crore exit in four months and Nifty IT drop 6% on AI fears. A US unwind means sharper selling here. The cushion is our DIIs, now absorbing most of it. We have also seen AI Proxy companies in India take a big hit and almost all of them fell around 7-8%. “While the long term thesis stays, we will have multiple zones of euphoria and falls coming in”

However, Bhagat says, “history suggests that businesses backed by strong balance sheets, healthy cash flows and sustainable earnings growth tend to recover much faster than companies whose valuations are driven primarily by market narratives.”

The key takeaway is that AI should be viewed as a long-term structural transformation, not a short-term momentum trade. The technology is likely to reshape industries over the coming decade, but not every company associated with AI will create lasting shareholder value.

Hence, the investment success will depend on owning businesses with sound fundamentals, strong execution capabilities and reasonable valuations - not simply those carrying the AI label.