The question of whether the rally in AI stocks has turned into a bubble has been top of mind for investors lately.

Wall Street investment banks have offered very different explanations: some warn that enthusiasm has gone too far, while others argue the move remains grounded in fundamentals.

That debate is exactly what Alpine Macro, an Oxford Economics–owned economic research firm, addressed in its latest 2026 outlook.

Rather than claiming a bubble is already in place, Alpine Macro asked a more forward-looking question: could the real risk emerge in 2026, once financial conditions begin to loosen?

Why Alpine Macro Says AI Isn't a Bubble — Yet

According to chief global strategist Chen Zhao, today's market does not yet show the classic signs of speculative excess. Investor skepticism remains elevated, with "AI bubble" chatter rising, a signal of caution, not complacency.

Sentiment surveys also point to balance rather than euphoria, a sharp contrast to the late 1990s when bullishness dominated.

“Investor sentiment is neutral. Bull-Bear spreads in the 1990s showed far more bulls than bears,” Zhao wrote.

Stock valuations, while higher, are not detached from reality.

Using the Fed model, which compares equity earnings yields with long-term bond yields, the firm estimates that the equal-weighted S&P 500 is roughly 25% undervalued.

The cap-weighted index appears fairly valued, while the Magnificent Seven trade at a premium that reflects growth expectations rather than speculative excess.

The comparison to the dot-com era is especially telling.

In 2000, growth stocks traded at more than double their bond-implied fair value, and Cisco Systems Inc. (NASDAQ:CSCO), the market's largest stock at the time, carried a triple-digit price-to-earnings ratio.

Today, Nvidia Corp. (NASDAQ:NVDA) trades at about 30 times forward earnings, supported by rapidly expanding profits.

Another key distinction is capital discipline. Alpine Macro finds little evidence of widespread overinvestment in AI.

Major technology firms have largely funded AI spending through internal cash flow instead of debt. IPO activity remains subdued, earnings are growing, and equity markets have shown a willingness to punish companies that overspend, dynamics largely absent in the late 1990s.

“The [AI] investment boom is in its early stages, especially compared with the surge during the internet boom,” Alpine Macro said.

‘Cheap Money’ Could Turn The AI Boom Into a Bubble

Despite the relatively healthy backdrop, Alpine Macro warns that the ingredients for a bubble may be falling into place.

According to economist Charles Kindleberger, asset bubbles usually require three conditions: a major technological shift, broad access to speculation, and cheap money.

Alpine Macro says AI already satisfies the first two, and the third could show up in 2026.

“The only missing ingredient is cheap money. But the Fed is gearing up for easing in 2026,” Zhao said.

If inflation falls faster than expected, the Federal Reserve could shift toward more aggressive rate cuts in the second half of 2026.

That shift could unlock roughly $13 trillion currently parked in money market funds and demand deposits, pushing capital into risk assets.

“A massive pool of dry powder is waiting. Money market funds plus demand deposits total $13 trillion—about 20% of U.S. stock market cap” Zhao added.

Meaningful rate cuts could push that cash into risk assets.

Financial markets are currently pricing in just over two Federal Reserve rate cuts by the end of 2026, according to the CME FedWatch Tool. Prediction markets tell a similar story.

Data from Polymarket show the highest odds assigned to a three-rate-cut scenario, at 22%, followed closely by two rate cuts at 20%. Expectations for Fed easing are largely concentrated in the second half of the year.

That timing reflects both the potential cooling of inflation and a leadership transition at the Fed, as Chair Jerome Powell's term expires in May.

The bottom line from Alpine Macro is not that an AI bubble is inevitable, but that the risk is rising — and that the Federal Reserve is likely to play a central role in how the AI story unfolds.

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Image created using artificial intelligence via Gemini.