Warnings about an artificial intelligence (AI) bubble are getting louder by the day. From Wall Street titans to the Bank of England, various experts are saying AI-related valuations are stretched, especially on the Nasdaq Composite index.
Like many investors, I have a lot of exposure to this ground-breaking technology in my Stocks and Shares ISA. Here’s how I’m adjusting my portfolio.
Circularity risk
The first thing I won’t do is panic after reading all these scary bubble headlines. To sell all my AI-related holdings would be a rash move, in my opinion.
But I’m also not blind to the risks. If OpenAI CEO Sam Altman is even saying an AI bubble is forming, then I think it’s safe to say there probably is one. His company has just been valued at $500bn!
Meanwhile, rival Anthropic has seen its valuation treble in 2025. In my eyes, these valuations are indeed getting silly.
One thing that has spooked some investors is the recent chip deal between OpenAI and Nvidia (NASDAQ:NVDA). Put simply, the core concern is that Nvidia is investing money in OpenAI, which will use some of that money to buy Nvidia’s products. Advanced Micro Devices (AMD) has also signed a supply agreement with OpenAI.
The apparent circular nature of these deals is reminding some investors of ‘vendor financing’. This was a practice seen in the dotcom bubble, where suppliers essentially lent money to customers to buy their products. Needless to say, that all ended badly.
Perhaps unsurprisingly, Nvidia CEO Jensen Huang doesn’t agree. Earlier this week, he told CNBC: “I think we’re at the beginning of a new buildout, beginning of a new industrial revolution.”
However, it’s worth noting that James Anderson, the former Scottish Mortgage Investment Trust manager, is even getting worried.
“It’s not quite like what many of the telecom suppliers were up to in 1999-2000, but it has certain rhymes to it,” he told the Financial Times. “I don’t think it makes me feel entirely comfortable from that point of view.”
Reductions
As I type, Nvidia’s share price is flirting with $200, edging the company’s market-cap closer to $5trn. The stock’s now doubled for me since April.
Long term, I’m optimistic on Nvidia’s growth opportunities in self-driving cars and humanoid robots. Both emerging markets will need mountains of chips. The company also has a fortress-like balance sheet and world-class management.
But to reduce risk, I will take some chips (pun intended) off the table in the coming days.
Another worry I have is US indexes, which are at record levels. A Nasdaq 100 ETF I bought in April is up 45%! I plan to offload this Big Tech-dominated ETF.
Finally, I have a large position in Taiwan Semiconductor (TSMC) in my SIPP, which has more than doubled since April. The chipmaker just reported a 30% rise in revenue for Q3, driven by surging AI chip demand.
Again, I’m bullish on TSMC long term. But to limit my exposure to a potential AI bubble, I’ll trim my position here too.
Looking elsewhere
Before ending, I should point out that I’m extremely bullish on AI’s potential. If anything, I think we’re underestimating how far-reaching its impact could be.
However, I’ll look for opportunities elsewhere, including the UK, where many valuations still look cheap.
