One Stock At The Heart Of AI Bubble: Bets Are High At Tech Stocks; Will Nvidia Earnings Calm The Warnings?

All eyes are on the world's largest AI behemoth, Nvidia, which is scheduled to release its second-quarter earnings report on August 26. Nvidia's earnings will arrive at a time when tech and chipmaking stocks are facing intense vulnerability as investors concern themselves about an AI bubble. AI is expected to change the economy and society and has already started to become an integral part of our daily lives. However, strategists, experts, and even the US Federal Reserve warn about an AI boom that is ready to burst at any moment, leaving a trail of severe impacts to the economy.

AI-Bubble Warnings

"AI is not a bubble... it is a rolling SEQUENCE OF BUBBLES...," said Dhaval Joshi, a renowned global macro strategist.

In his warnings, Dhaval points out on assessment that made investors realized AI is not an opportunity to software but an existential threat to traditional software, such as a service (SaaS) business model. Hence, he believes a software boom is on the verge of bursting.

Then he signals AI's impact on chipmakers. He said, "On reassessment, however, investors are realizing that the chipmakers do not have 'moats' around their profits. Astronomical margins will crash back to earth when demand and supply equilibrate, as they ultimately must. So, the semis boom is unwinding - though has further to go."

If that is not enough to send jitters to investors, the latest warning in the US Federal Reserve's minutes of the August meeting gives a scarier picture.

In the minutes, FOMC members believe there is a downside risk to AI developments, and it could disappoint, leading to a significant repricing of stocks, with consequent negative effects on consumer spending. They can also generate tighter financial conditions and create strains in financial institutions directly or indirectly exposed to the sector.

Fed minutes raised alarms on the increased degree to which capital spending in the AI sector was being financed by borrowing, including credit provided by nonbank investors or regional banks. They believe it needs monitoring.

Hence, an AI-bubble that could pop anytime is a fear that lingers in the sector.

When talking about AI, Nvidia is at the epicenter of it. Why? NVIDIA is so dominant in AI because it built the full infrastructure stack for modern AI, not just powerful chips. And this company, with over $5 trillion market valuation, is in the limelight as it prepares to declare its quarterly results.

What To Expect From Nvidia In Q2?

"We're looking for another beat-and-raise quarter, given the strong capex trends among hyperscalers and enterprises. Nvidia should generate well over $300 billion of data center revenue in calendar 2026, which is effectively fiscal 2027, and perhaps over $500 billion in fiscal 2028. We expect to hear an update regarding sales (or non-sales) into China," said Brian Colello, CPA, a senior equity analyst, technology, for Morningstar in a note.

Perhaps the most polarizing issue has been Nvidia's financing and backstopping of certain partners, including its recently announced $500 billion mobilization of large financial asset managers to invest in artificial intelligence. Brian said, "We trust that Nvidia will lay out its case for why it is arranging such partnerships and/or financing certain firms."

Further, the analyst does not see any risk to Nvidia's moat. Its superior GPU hardware for AI, its software ecosystem around Cuda, and its networking and interconnectivity expertise should keep the company at the forefront of AI workloads.

Nvidia Stock: Overvalued Or Undervalued

At present, Nvidia is at $213.05 apiece on Nasdaq, with a market valuation of $5.16 trillion. YTD, Nvidia shares is up 13%, while in a year, the growth is over 17%. Nvidia's all-time gains are mind-boggling at 532,525%, with the stock's biggest breakthrough on exchanges seen since late 2021 to early 2022. The stock was broadly stagnant and below $1 from January 1999 to early January 2016, as AI was still an alien word back then.

Despite this, a Morningstar analyst believes Nvidia is undervalued. He said, Nvidia stock appears undervalued to us. It appears investors have gravitated away from the stock toward a host of other AI "picks and shovels" plays in memory and optical semis. We still see upside in Nvidia stock as long as it remains on pace to hit its near- and medium-term revenue targets.

Bets & Stakes Are High In AI Stocks

The top ten largest stocks on the US market are betting big and heavy on AI adoption, innovation, and expansion. Together, they account for 40% of the S&P 500. In just the first half of 2026, tech giants like Amazon, Microsoft, META and Alphabet have spent $303 billion on AI data centers, which is triple the spending in the last five years. For the past three years, both the S&P 500 and Nasdaq Composite have surged by 82% and 100%, respectively, and a major part of this stellar performance is the AI boom.

There is immense enthusiasm for AI stocks because the major consensus is that they will drive the economy in the future. However, there is no guarantee that this AI spending will pay off.

Whether the AI boom is rational or not, or even if the extraordinary spending succeeds in the future, the correction is inevitable in tech stocks.

The latest research of the European Central Bank reveals the current excitement surrounding AI has many historical precedents. To name just a few: the railway boom of the 19th century, the expansion of electricity and radio in the 1920s, and the surge of the internet, or the "dot-com era", in the 1990s. In each case, a genuinely transformative technology attracted investment, and the stock market valuations of firms that adopted it rose strongly before falling sharply. Economic research offers two complementary explanations.

First, the rational view argues that high valuations can be justified by extreme uncertainty about a new technology's productivity, as per the research. For instance, why did NVIDIA shares skyrocket 20-fold since 2022? Because investors rationalized that Nvidia would become the next Google - with a highly uncertain and potentially large upside. In the worst case in such a scenario, investors lose their investment. But in the best case, the gains are large and genuinely hard to bound. This "option value" increases the stock valuations of early adopters, causing their price-to-earnings ratios to rise sharply.

But even so, the ECB believes that even if the technology succeeds, stock prices may eventually fall. Why? ECB points out that the nature of uncertainty shifts from a "single sector" to the "entire" economy. Initially, the new technology is like a small-scale experiment. If it fails, it's unfortunate for that company, but the rest of the economy is unaffected. The risk can be diversified away.

As adoption spreads, the same uncertainty becomes economy-wide. If something then goes wrong with that technology, the whole economy suffers. This risk cannot be diversified, so investors demand a higher risk premium. However, this does not necessarily mean that profits will fall. Adoption itself is good news for cash flows, but the rising risk premium has the opposite effect and tends to prevail historically, unless profit growth is strong enough to compensate for that. The exact timing is unknowable in advance. These boom-bust patterns are only identifiable with hindsight.