The Blogs: From the Crash of 1929 to AI Boom of 2025: Are We Living Through Another Bubble? | Vincent James Hooper

In the closing months of 2025, financial markets find themselves suspended between exuberance and unease. Artificial intelligence, long hailed as the engine of a new industrial age, now dominates global stock valuations, reshaping not only portfolios but also economic narratives. Yet beneath the surface of trillion-dollar market capitalizations and record investor inflows, a more sobering question looms: are we witnessing the rise—and potential rupture—of an AI bubble?

Central Banks Raise the Red Flag

In recent weeks, the Bank of England and the International Monetary Fund have issued unusually direct warnings. Both institutions highlight the rapid escalation of valuations across AI-linked equities, the dominance of a small cluster of technology giants, and the sheer velocity of capital flowing into generative-AI ventures. These dynamics, they note, are not unfamiliar. They recall the speculative patterns that preceded both the Wall Street Crash of 1929 and the dot-com collapse of 2000.

The Bank of England’s Financial Stability Report was especially blunt. It cautioned that “valuation metrics in AI-linked firms are diverging significantly from earnings potential” and that “the speed of investor concentration poses systemic risks if sentiment turns.” The IMF’s own Global Financial Stability Review echoed that assessment, emphasizing how retail and institutional “herding behavior” has intensified through algorithmic trading and AI-themed exchange-traded funds (ETFs).

As of late 2025, a handful of firms—Nvidia, Microsoft, Alphabet, Amazon, and Apple—represent over one-third of global equity capitalization. Much of that weight rests on expectations of an AI revolution that will swiftly translate into profit, productivity, and permanent advantage.

Historical Parallels: When Technology Becomes Theology

The comparison between the 1920s and today is more than poetic. In both eras, a transformative technology—electricity then, artificial intelligence now—was believed to usher in an age of boundless prosperity. Investors and policymakers alike spoke of “a new economy” in which old valuation rules no longer applied.

The psychological parallel is telling. In both periods, markets treated innovation not as a means to growth but as a moral certainty—a narrative of inevitable progress immune to normal economic gravity. That belief, once entrenched, encouraged speculative excess and over-leverage.

Retail Investors on the Front Line

Retail participation has soared in the AI wave. Millions of small investors have poured savings into AI-themed funds, app-based portfolios, and fractional shares of tech giants. For many, the story is irresistible: machines that can think, create, and out-earn humans sound like the ultimate investment thesis.

Yet history suggests retail investors are often the last to arrive at the party—and the first to feel the pain when the music stops. Their exposure is magnified by concentration risk: many AI-themed funds are heavily weighted toward the same small cluster of megacaps. A shift in sentiment—or a disappointing earnings cycle—could trigger broad losses, with limited diversification to cushion the fall.

Behavioral dynamics make this worse. “FOMO”—the fear of missing out—drives momentum buying, often at inflated prices. When corrections arrive, panic selling follows. During the dot-com crash, retail investors exited technology stocks only after 70–80% declines. The risk is that history repeats, only faster, in an algorithmic market where trading happens in milliseconds.

The Reality Gap: Investment vs. Returns

A widely cited 2025 MIT study examined roughly $35 billion invested in generative AI across 500 firms. It found that while pilot projects proliferated, fewer than 10% had achieved measurable productivity gains. Many firms faced high energy costs, integration issues, and unreliable model outputs. In short, investment was racing far ahead of realized economic benefit.

This “reality gap” mirrors earlier bubbles, where capital inflows outpaced functional deployment. In the 1990s, internet infrastructure was built faster than business models could profit from it. Today, AI’s capacity to automate, predict, and personalize is real—but the short-term monetization remains elusive.

Market Mechanics: From Valuation to Vulnerability

The AI boom’s structural concentration poses a second-order risk. Passive investing through index funds amplifies exposure: if a few tech giants fall, every pension, mutual fund, and retirement account feels the hit. AI’s promise has created a market that is deep, liquid, and fragile all at once.

Algorithmic trading systems further exacerbate volatility. Many are tuned to momentum indicators—buying rising assets and selling falling ones—creating self-reinforcing feedback loops. Should AI sentiment reverse, these automated strategies could accelerate a downturn, much like “portfolio insurance” amplified the 1987 crash.

The Policy Lens: Central Banks Walk a Tightrope

For central banks, the challenge is delicate. They cannot and should not deflate innovation, yet they must prevent systemic excess. Policymakers face three overlapping imperatives:

Monetary Prudence: Maintain balanced rates that restrain speculation without choking growth.

Macroprudential Tools: Tighten leverage limits on AI-focused funds and platforms.

Transparency and Disclosure: Mandate consistent reporting on AI revenues and productivity metrics to separate substance from hype.

The irony is that AI itself may eventually become a tool for financial supervision—detecting speculative patterns faster than human analysts. Until then, regulators remain the sentinels of market sanity.

The Soft-Landing Scenario

A crash is not inevitable. The 1929 comparison has limits: today’s systems are stronger, central banks are proactive, and investor awareness is deeper. A “soft landing” is possible if earnings slowly catch up to valuations, or if capital disperses into diverse sectors applying AI rather than merely selling it.

Sector rotation into industrials, logistics, and healthcare could also stabilize valuations, creating a broader productivity lift rather than a narrow speculative mania.

Summary: Bubble Indicators, Tools, and Scenarios

Between Vision and Vigilance

The AI era is real, and its potential is profound. But the faith that every algorithm will mint gold is a collective illusion—one that even the smartest machines cannot sustain. Financial history shows that progress and prudence are not enemies but partners.

In 1929, technology promised endless productivity; instead, the world received a depression. In 2000, the internet promised infinite growth; it delivered transformation, but only after collapse. In 2025, artificial intelligence stands at the same crossroad.

The Bank of England’s warning is therefore less about panic than perspective. It reminds markets that revolutions—digital or otherwise—take time to earn their valuation. The question is not whether AI will change the world. It will. The question is whether markets will allow reality to catch up with their dreams before gravity does it for them.

Implications for the MENA Region

For the Middle East and North Africa, the global AI bubble debate carries distinct strategic consequences. Gulf sovereign wealth funds, among the world’s largest investors in technology, are heavily exposed to US and Asian AI assets through partnerships with major venture funds and megacaps. A correction would ripple through their portfolios, affecting fiscal planning and diversification strategies under national visions such as Saudi Arabia’s Vision 2030 and the UAE’s We the UAE 2031.

Yet the MENA region also stands to benefit from recalibration. If global AI valuations normalize, capital may flow toward applied innovation—AI in energy management, logistics, and Arabic-language models—areas where regional economies possess comparative advantage. The key for policymakers is to avoid speculative contagion while using the moment to localize AI value creation.

In that sense, vigilance in valuation could be MENA’s competitive edge. Where the West speculates, the region can build.