Even the biggest proponents of artificial intelligence are sounding the warning.

OpenAI’s chief, Sam Altman, compared the runup in artificial intelligence (AI) stocks to the 1990s dot-com bubble.

Add to that a study by the Massachusetts Institute of Technology (MIT) that just came out. It found that 95% of companies spending money on generative AI will end up seeing no benefit.

Yet money continues to flow into the sector. Around $2.7 trillion has been sunk into 498 AI “unicorns” – private companies with a valuation of $1 billion or more.

But the AI industry is hardly the only one showing bubble behavior… and cracks are starting to form…

No Crying in the Casino

Signs of a valuation bubble aren’t confined to just AI stocks.

Investor risk appetite is showing up in all the usual places as greed and complacency rise to unsustainable levels.

Newer companies coming to market via initial public offerings (IPOs) are surging. The first half of 2025 saw the largest number of IPOs in four years. Companies going public are typically early in their life cycle and have limited profits (if any). But that hasn’t stopped investors from pushing their valuations to insane levels.

Recall the recent IPO of crypto exchange Bullish (BLSH) that I mentioned last week. The stock soared 83% in its trading debut and is currently valued at $10.3 billion despite losing $348 million in the last 12 months.

Even highly speculative special purpose acquisition companies (SPACs) are making a comeback. These are “blank check” companies that are formed to acquire another business.

“SPAC King” Chamath Palihapitiya is raising funds for a newly formed SPAC for the first time in years. His previous SPAC ventures following the pandemic collectively lost investors more than $12 billion.

Chamath is at least warning investors they could lose it all. The language in the filing document literally states there is “no crying in the casino.”

A casino is exactly what the stock market has become, with investors rushing into risky bets.

But stocks and ETFs most exposed to the bubble are showing signs of exhaustion…

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Cracks Are Forming in the Stock Market

Timing a bubble’s pop is notoriously difficult. As we’ve seen this year, stocks can continue grinding higher even with signs of speculative excess.

But cracks are finally emerging in the rally’s foundation. Some of AI’s biggest winners are finally coming off their highs.

AI-linked stocks dominate the major indexes and the funds that track them. Companies like Nvidia (NVDA), Microsoft (MSFT), and Apple (AAPL) are among the largest holdings in the Nasdaq-100.

Collectively, the top 10 holdings in the Invesco QQQ Trust, Series 1 (QQQ) – which tracks the Nasdaq-100 – make up 52% of the fund.

As a result, the recent weakness in AI-linked stocks dragged QQQ lower from the August highs. And there were warning signs that QQQ was losing momentum.

Look at the chart below:

As QQQ was rallying to new highs in August, the Relative Strength Index (RSI) flashed a warning. The RSI measures underlying price momentum. It made a lower high (dashed lines). Since then, QQQ pulled back to test the 50-day moving average (MA – blue line).

When the RSI doesn’t support a stock’s up move, it’s a sign of weakening momentum. And given the incredible run off the April lows, it shouldn’t be surprising to see QQQ pull back.

If we’re going to see follow-through to the downside, there are a couple of levels to watch over the short term.

The first is with the 50-day MA, where QQQ found support last week. That’s also lining up with price support at the $560 area.

A move below those levels would mark the first significant loss of support since the start of the year.

It’s too early to tell if that would pop the bubble. As I said above, investors’ enthusiasm can last much longer than we might assume.

But at some point, excessive risk-taking and valuations will come back to bite investors. The charts will hint at when that time is arriving…

Happy Trading,

Larry Benedict
Editor, Trading With Larry Benedict

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