Is the AI Bubble Bursting or Is the Sector Just Catching Its Breath?

Many AI stocks struggled in December, causing some investors to speculate about whether the AI bubble was bursting. Concerns over data center financing, project timelines, and OpenAI's ability to pay Oracle were among the headlines that spooked investors.

The market has sung a different tune in the new year, with many AI stocks surging out of the gate. While some investors still believe that AI is in a bubble that is bound to burst, rising stock prices don't always indicate a correction is due. Here's why it looks to me as though the AI industry is just catching its breath.

Revenue growth and applications are real

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Some people who refer to this era as an AI bubble point to the dot-com bubble for parallels, but the two periods couldn't be more different. During the dot-com bubble, just adding ".com" to a company's name was enough to attract speculators and drive massive stock gains, even if the company wasn't making any money.

Meanwhile, the AI sector's growth is being led by some of the world's most valuable tech companies. Nvidia (NASDAQ: NVDA) produces real revenue and profits because its chips power the AI industry. Alphabet, Amazon, and Microsoft are tech giants that are using AI to improve their products and offer new services. That has translated into higher sales and profits.

Current AI case studies don't even include the impact of long-term innovations such as self-driving vehicles and humanoid robots, both of which will require AI to operate.

Big tech is committing more money to AI

Some people are worried that the AI bubble is at risk of popping because most of the spending has come from just a few megacap tech companies. However, those same leaders have committed to spending more on AI in 2026 than they did last year.

Goldman Sachs expects AI spending this year to come in above current forecasts. The financial giant pointed out in a research note that analysts have consistently underestimated capital expenditures related to AI.

The long-term potential of AI suggests that spending on the technology will continue to increase, as applications like ChatGPT and Grok have only scratched the surface of the opportunity. It's a far cry from bubble fears. While AI stocks may go through sharp corrections more often than the average stock, those moves reflect the impact of strong price momentum rather than structural flaws with the thesis.

Smaller AI stocks stand to benefit the most

AI chipmakers like Nvidia and Broadcom may benefit from most of the headlines, but small-cap stocks are the better choice for long-term profits. Those types of growth stocks rally the most during market rallies, especially if they have good fundamentals.

When AI stocks recover and stage another big rally, well-known AI chipmakers will likely gain value. They thrive in the age of AI because they address a key need. You can't have AI if you don't have powerful chips to handle the workloads.

However, chips aren't the only key ingredients in AI, and others also present compelling long-term opportunities. Among the many bottlenecks preventing an even faster expansion of the AI sector are energy, materials, data centers, and memory storage.

Shares of memory makers like Micron (NASDAQ: MU) more than tripled over the past year, and they've started 2026 strong. While Micron is a megacap stock, it has a low valuation due in part to the fact that it has gotten limited attention from investors.

The demand for AI chips comes as companies are using AI to meaningfully improve their services and boost profits. That type of growth, plus the technology's long-term potential, suggests AI stocks will march higher again after their quick breather.

Marc Guberti has positions in Broadcom. The Motley Fool has positions in and recommends Alphabet, Amazon, Goldman Sachs Group, Microsoft, Nvidia, and Oracle. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.