With spending on artificial intelligence (AI) infrastructure set to reach new heights this year, it’s not wrong to question if we are heading into bubble territory. After all, the five largest hyperscalers (owners of massive data centers) are set to spend more than $700 billion in capital expenditures (capex) on AI data centers alone in 2026. That’s a massive amount of money that is more than the gross domestic product (GDP) of all but about 24 countries.
If the AI infrastructure build-out slows, it is going to impact a lot of large companies, including the world’s largest, Nvidia (NASDAQ: NVDA), which makes up over 7% of the S&P 500 index. Large cloud computing companies have already started to issue debt to support their spending plans, and with these investments now set to start pushing up or exceeding these companies’ operating cash flow, this spending will eventually peak. If you lived through the dot-com bubble, that is not something you want to experience again.
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That said, the market today is certainly a lot different from what it was back then. The valuation of Nvidia, which is the backbone of the AI build-out, is very reasonable today, trading at a forward price-to-earnings (P/E) ratio of about 22. This is in stark contrast to Cisco Systems, which was the backbone of the internet infrastructure build-out and had a P/E of over 100.
Meanwhile, Nvidia is just one piece of the puzzle. Many of the hyperscalers that are spending so much money on this capital expenditure (capex) are huge publicly traded companies, including Alphabet, Amazon, Microsoft, and Meta Platforms. If their spending ends up being front-end loaded and they are able to cut back on this capex in future years, then their stocks could actually benefit from reduced AI data center spending, as they return to generating huge free-cash-flow numbers.
Even if the market is in an AI infrastructure spending bubble, which is certainly up for debate, I don’t think it will tank the entire market, but instead shift its leadership. That is why I think dollar-cost averaging into an S&P 500 index fund like the Vanguard S&P 500 ETF (NYSEMKT: VOO) is still the smartest move to make, even if you are worried about an AI bubble.
First, no one knows if the market is in an AI infrastructure bubble or not, and if it is, when it will end. If investors wait on the sidelines, they could miss years of gains. Second, some stocks should benefit from lower AI data center spending, and as a market-cap-weighted index, the S&P 500 will let new winners rise to the top, like it always does. Third, by dollar-cost averaging, you help take market timing out of the equation and build positions over time for the long term.
