Should Artificial Intelligence (AI) Stock Investors Prepare for a Bear Market in 2025?

Big tech companies began investing in artificial intelligence (AI) over a decade ago. But recent advancements in the space have turbocharged returns for AI stock investors over the last three years. Without question, it's been a raging bull market for AI stocks.

Nvidia (NASDAQ: NVDA) has certainly been at the forefront of the bull run. The company's graphics processing units (GPUs) are pivotal hardware devices when it comes to handling the outsize computing demands that AI brings to the table.

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Strong demand for GPUs has done two things. First, Nvidia's revenue has soared, obviously. But second, profit margins have skyrocketed because demand far outweighs supply. Nvidia can ask for a lucrative price without scaring away potential customers.

NVDA Revenue (TTM) data by YCharts

The AI bull market is exciting. But should investors prepare for a bear market in 2025?

At first, the question is preposterous. When it comes to great growth trends for the coming decade, many consider the AI trend to be one of the biggest. For example, market intelligence firm International Data Corporation believes that annual spending for AI infrastructure will surpass $200 billion in 2028, compared with spending of less than $50 billion in 2024. That's massive.

Nevertheless, it's prudent for AI stock investors to prepare for a bear market in 2025. But as I'll explain, this doesn't mean what it might sound like it means.

Reasons to prepare for a bear

There's never a clear view of the future, and the stock market's behavior demonstrates this. Investors never know exactly what's going to happen -- if they did, the market would always be perfectly valued. But in reality, stocks usually fluctuate between being overvalued and being undervalued, based on how investors are feeling about the future.

Image source: Getty Images.

Investors are clearly feeling good about AI right now, but there are plenty of things that could soon cause them to question their assumptions. For example, export restrictions from the U.S. to China limit what Nvidia can do in that market and it's providing opportunities for Chinese AI players such as Huawei.

If an AI challenger such as Huawei can develop AI hardware that can better compete with Nvidia, it could alleviate the imbalance in supply and demand. And that would impact Nvidia's profit margins.

Moreover, China doesn't have access to the most up-to-date tech from U.S. companies. But necessity can be the mother of invention. For example, Chinese start-up DeepSeek claims to be building AI models that can do more with less. And with these breakthroughs (and potentially others in the future), it could impact how much companies need to spend on infrastructure. And it could even change electricity consumption forecasts.

The point is not that the AI market will crash. The point is that the future is inherently fraught with unknowns. And as new developments come along, investors' expectations can quickly change, replacing market euphoria with despair -- it happens all the time.

How to prepare

I'm saying that the AI market's future is unknown, and unforeseen negative developments could send AI stocks plummeting.

Some might object: That's how the stock market works generally, not just AI stocks. And I agree with that objection. What I'm proposing could happen with AI stocks could also happen to any sector of the stock market.

I wouldn't recommend reworking a stock portfolio and changing an entire investment strategy to prepare for a bear market that may or may not be on the horizon. To the contrary, the best way to prepare for a bear market in AI stocks, in my opinion, is to continue to apply timeless, good investment principles.

For starters, investors should prepare for an AI stock bear market by having a diversified AI portfolio. For example, it's hard to argue against owning Nvidia stock for investors who believe in the long-term AI trend. However, investing in the AI trend from another angle is prudent as well. One idea would be to invest in the massive infrastructure needs with a real estate investment trust (REIT) such as Digital Realty Trust (NYSE: DLR). This company should enjoy strong demand for its real estate as tech giants invest in AI data centers.

Another way to prepare for a possible bear market is to have some cash on the sidelines. This is because investing regularly is a good long-term investing approach. This helps investors to get stocks at highs and lows without trying to time the market. But to invest regularly, one needs to have cash available.

To be sure, the AI trend is exciting. Certain companies are better positioned for the trend than others. But rather than go all-in on a single idea right now, it's better to maintain a good, solid approach to investing, understanding that a bear market is always a possibility. And regularly investing in a variety of ideas is one of the best ways to prepare for this inevitability.

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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.