AI Bubble Pops as Stocks Rebound
· news
The AI Bubble Pops, For Now
A recent stock market correction has left investors reeling, but Tom Lee, cofounder of Fundstrat Global Advisors, believes the companies at the center of the AI trade still have years of runway ahead. He expects the market to rebound later this year.
The current market dynamic is a perfect storm of leverage and hype. Margin debt has surged 54% annually, one of the largest increases in the past 60 years. This has created a situation where investors are forced to sell holdings to cover margin debt, leading to a massive correction. The Korean stock boom, fueled by leveraged ETFs and frenzied demand for chipmakers SK Hynix and Samsung, is a stark reminder of what happens when speculation gets out of control.
The AI trade has been characterized by an unwavering faith in the potential of AI to drive growth. However, investors’ willingness to take on debt has matched this enthusiasm. The hyperscalers’ gargantuan spending plans have sparked concerns about their sustainability, but investors have continued to pile in. A Chinese AI model’s release that cast doubt on these plans was the final straw, leading to a sharp decline in stocks.
Lee is right to argue that the correction is healthy. It reduces speculation ahead of upcoming earnings reports from the AI sector and provides an opportunity for investors to reassess their positions. The S&P 500’s 2% dip from its recent high and the Nasdaq’s 6% slide look like speed bumps compared to the Kospi’s 27% crash.
The bond market, however, is telling a different story. Investors are showing signs of waning enthusiasm for the AI boom, with hyperscalers’ cover ratio plummeting from nearly 5x in February 2026 to below 2x in July. This suggests that investors may need wider spreads to absorb additional hyperscaler supply.
The dollar bond market has become saturated, forcing tech giants to issue debt in other currencies. As a result, issuers will likely have to provide more attractive terms, increasing their borrowing costs. The Treasury Department’s flood of debt is also putting pressure on the AI-related debt market.
Hyperscalers are facing widening spreads due to investors trying to rationally price in an accelerating pace of issuance. However, this rationality is short-lived as investors adapt to changing market conditions.
A Cautionary Tale
The Korean stock boom’s collapse serves as a warning for investors. The rapid rise and fall of SK Hynix and Samsung’s shares was fueled by leveraged ETFs and frenzied demand. When the correction came, it was brutal, with 1.2 million brokerage accounts facing margin calls.
Similar patterns have played out in other markets, from the dot-com bubble to the housing market crash. The current AI trade has many of the same characteristics: hype, speculation, and a willingness to take on debt.
What’s Next?
The correction may be healthy, but it’s also a warning sign for investors. As the federal deficit continues to deepen and is on track to hit $2 trillion this fiscal year, the pressure on the AI-related debt market will only intensify. Investors will need to adapt quickly to changing market conditions.
The AI trade is not over yet, but its momentum has been checked. The question now is whether investors can separate the signal from the noise and make rational decisions in an increasingly complex market. One thing is certain: the correction may be a blessing in disguise for those who are willing to take a step back and reassess their positions.
The AI bubble pops, for now. But will it stay popped? Only time will tell.
Reader Views
- CMColumnist M. Reid · opinion columnist
The AI market correction is just what investors needed: a cold dose of reality. But let's not forget that this bubble was fueled by reckless speculation and lax underwriting standards in leveraged ETFs. The bond market's telling signal – hyperscalers' shrinking cover ratios – suggests investors are growing wary, but the rebound will likely be short-lived unless fundamental reforms are implemented to prevent the next speculative frenzy.
- RJReporter J. Avery · staff reporter
While Tom Lee's optimism about the AI sector's long-term prospects is warranted, investors shouldn't gloss over the stark reality: this correction was a direct result of overheated speculation fueled by leveraged ETFs and margin debt. The AI bubble was bound to pop, given its reliance on unsustainable spending plans and unwavering faith in AI-driven growth. What's missing from the conversation is the impact on smaller players that can't absorb another downturn, potentially leading to widespread consolidation or even bankruptcies.
- ADAnalyst D. Park · policy analyst
The AI bubble may have burst, but its remnants are still very much alive in the bond market. The hyperscalers' dwindling cover ratios indicate that investors are growing increasingly skittish about lending to these companies, even as Lee remains optimistic about their long-term prospects. This divergence between equities and fixed income suggests that while some investors may be betting on a rebound, others are already pricing in the risks of these firms' unsustainable spending plans.