Investors are increasingly wary of an artificial intelligence bubble, with tech valuations surging past historical benchmarks. Hedge funds and institutional players are placing strategic wagers on factors that could deflate the market, including rising interest rates, cooling demand, and regulatory crackdowns.
- AI stocks in the S&P 500 now represent 24% of total index market cap, the highest since 2000.
- Forward P/E ratios for AI equities rose to 65 in late 2025, up from 38 in early 2024.
- Put options on AI ETFs like ARKK and BOTZ saw a 130% increase in open interest since September.
- 10-year U.S. Treasury yield reached 4.9%, increasing pressure on high-growth tech valuations.
- Regulatory enforcement of the EU AI Act began in November 2025, impacting over 200 AI applications.
- AI infrastructure stocks fell 19% since October, while early-stage AI funding dropped 40% YoY.
Wall Street’s growing unease over the artificial intelligence sector is shifting from speculation to active hedging. As AI-related equities have climbed more than 70% year-to-date in major indices, some investors are betting on a correction by targeting pivotal risk factors. The S&P 500’s AI-focused cluster, including names like NVIDIA, Microsoft, and Alphabet, now accounts for nearly 24% of the index’s total market cap—its highest share since 2000. The concern stems from a widening gap between projected AI-driven revenue and actual earnings. According to internal firm data, the average AI stock traded at a forward P/E ratio of 65 in late 2025, up from 38 in early 2024, despite revenue growth estimates slowing to 28% from a peak of 45%. This divergence has prompted hedge funds to deploy put options on AI-heavy ETFs such as ARK Innovation ETF (ARKK) and Global X Robotics & AI ETF (BOTZ), with open interest rising 130% since September. Market participants are also monitoring macroeconomic signals. With the 10-year U.S. Treasury yield hitting 4.9%—its highest level since 2007—funding costs for long-duration tech bets are rising. Analysts note that every 50-basis-point increase in rates correlates with a 12% average decline in AI stock valuations over a 60-day window. Additionally, regulatory scrutiny is intensifying, particularly in the EU, where the AI Act’s enforcement phase began in November 2025, affecting over 200 high-risk AI applications. The ripple effect is already visible. Stocks in AI infrastructure segments—semiconductors, cloud services, and data centers—have seen a 19% pullback since October, while early-stage AI startups are facing a 40% reduction in fundraising compared to the same period last year. As the market recalibrates, the next major catalyst could be a single earnings season where AI revenue fails to meet expectations, potentially triggering a broader tech sell-off.