Jonathan Raa/NurPhoto via Getty Images
- Economist Ruchir Sharma says AI exhibits the signs of a bubble.
- Big Tech's AI spending is soaring fast, mirroring the dot-com overbuild before the 2000 crash.
- Sharma warns that higher interest rates could burst this bubble.
The AI frenzy that's driving markets and corporate spending may be heading for a hard landing in 2026.
In an interview with Norges Bank Investment Management CEO Nicolai Tangen, renowned economist Ruchir Sharma said that the AI surge now checks every box on his four-part bubble checklist. And a single trigger could bring it all crashing down in 2026 — higher interest rates.
Higher rates reduce the availability of cheap capital that's been fueling AI investment and put downward pressure on growth-stock valuations.
Sharma's 'four O's' playbook
To diagnose bubbles, Sharma uses what he calls the four O's. He said the AI boom is flashing red on all four: overinvestment, overvaluation, over-ownership, and over-leverage.
Sharma said that AI and tech spending in the US has surged at a rate that is comparable to past bubbles, such as the dot-com era. Valuations of major AI players are also approaching bubble territory when judged by long-term earnings and free cash flow.
At the same time, Americans are holding a record share of their wealth in equities, and most of those trades are AI-related, he said.
And after years of running cash-rich balance sheets, Big Tech is now issuing massive amounts of debt to fund the AI arms race.
Over the last few months, Meta, Amazon, and Microsoft have become "the biggest issuers of debt," Sharma said — a classic late-cycle bubble sign.
Sharma estimated that roughly 60% of US economic growth this year has been driven by AI, both through companies pouring money into new infrastructure and through the stock-market wealth effect lifting spending among high-income consumers.
But the underlying economy looks much weaker without it, he said — and that's exactly why Sharma thinks the AI trade has become so dangerously crowded.
"Outside of AI, there's a lot of weakness in the US economy," he said.
"This big bet on AI better work out for America — because if it doesn't work out, then I think there's a lot of trouble for this country ahead," he added.
Why 2026 could be the breaking point
Sharma doesn't pretend he can call the exact top. But he said one thing bursts every bubble, and that is interest rates going up.
He identified three conditions that are already building. First, inflation remains "sticky," and far from the Fed's 2% target, he said. Second, the Fed has missed its target for five consecutive years and may soon face pressure to halt its interest rate cuts. Thirdly, AI-driven investment has sustained strong growth, which could push inflation higher again.
"At the slightest sign that interest rates are going to go up, I think that's your sign that, 'Okay — this is done now,'" Sharma said.
That's because higher rates make borrowing costlier and slash the valuations of high-growth companies — the exact conditions that tend to burst bubbles.
He said he expects that moment to likely arrive in 2026 — a view shared by other veteran investors, but on different timelines.
Greg Jensen, co-chief investment officer at Bridgewater Associates, said on Tangen's podcast last week that "the bubble is ahead of us" without giving a timeline, while Mel Williams, cofounder and partner at TrueBridge Capital Partners, warned of "a lot of carnage" over the next 10 years.
A 'good bubble' — but still a bubble
Sharma said the AI boom could be a "good bubble" that could ultimately boost productivity — like past tech manias that overshot but left valuable infrastructure in their wake. But that doesn't mean investors won't get hurt.
Still, one area he thinks could shine after the correction is quality stocks — companies with high returns on equity, strong balance sheets, and consistent earnings.
That category has badly underperformed the market during the AI frenzy, creating what he called "the single best investment idea" heading into 2026.