Will the AI bubble in the United States burst in 2026?

Renowned economist Ruchir Sharma shared his bold predictions on the potential timing of the future AI technology bubble burst and investment trends for 2026.

In an interview this week, economist Ruchir Sharma stated that despite the Federal Reserve's recent interest rate cuts, inflationary pressures remain stubborn, having failed to reach the 2% target for five consecutive years, and the inflation rate is expected to remain close to 3% next year.

He emphasized that once the U.S. economy remains strong and rising inflation forces the Federal Reserve to shift towards interest rate hikes, the current excessive investment bubble driven by AI capital expenditure will face its end.

This economist also proposed three major investment trend predictions for the market in 2026: the AI bubble may end at some point, high-quality stocks will regain favor, and the long-standing trend of international markets outperforming the U.S. market will continue.

Interest Rates as the Sole Trigger for Bubble Burst

Sharma emphasized that the market's confidence in AI is so strong that investors are willing to invest various capitals without questioning it.

However, he pointed out that skepticism will arise when interest rates rise. He reflected on history, stating:

Every bubble or frenzy in history has been punctured by the same factor, which is when interest rates eventually rise.

Sharma added that smart investors will wait for this signal to appear and exit before the bubble bursts.

The current inflation situation provides the possibility for interest rate increases. The Federal Reserve has failed to achieve the 2% inflation target for five consecutive years, and even next year's inflation rate appears to be closer to 3% rather than 2%. If the economy remains strong, partly driven by massive capital expenditures in the AI sector, inflation may continue to accelerate from current levels.

Sharma expressed confusion over the Federal Reserve's decision to cut rates in the current environment, speculating it may be under pressure from the White House, or that the Federal Reserve reacts to any slight signs of trouble but does not take action when conditions are favorable.

He observed that whenever the U.S. stock market experiences slight fluctuations due to interest rate hike expectations, the Federal Reserve sends dovish signals to soothe the market. Recently, the expectation of a rate cut by the Federal Reserve in December surged from less than 30% to nearly 100%, reflecting a similar reaction pattern.

However, Sharma emphasized that if inflationary pressures force the Federal Reserve to choose between raising rates or halting rate cuts, the rules of the market game will change completely.

2026 Investment Outlook: Focus on High-Quality Stocks and International Markets

While warning about the AI bubble, Sharma also provided his three major investment trends for 2026.

He stated that in the context where AI concept stocks appear expensive and safe-haven assets like gold have risen significantly, investors are facing the dilemma of "what should we buy?"

His primary recommendation is to "buy high-quality stocks." These stocks typically have characteristics such as high return on equity (ROE) and low leverage.

Sharma's research found that these stocks have experienced one of the worst performances on record over the past 12 months, significantly lagging behind the market. He believes this presents an excellent buying opportunity for investors Secondly, he predicts that the AI bubble may end in some way at a certain point next year, which is closely related to interest rate trends, although the exact timing is difficult to predict.

Finally, Sharma believes that the trend of international markets outperforming the U.S. market will continue. He thinks that this trend, which began in 2025, is not a "flash in the pan," but the beginning of a multi-year cycle.

Therefore, he expects this performance to continue in 2026, providing opportunities outside the U.S. for investors seeking diversification and growth