AI bubble or sustainable boom? T. Rowe Price offers a nuanced view on valuations and investment strategies

It’s become a dominant question on trading desks and in boardrooms: has the rapid ascent of artificial intelligence pushed equity valuations into bubble territory? According to research by T. Rowe Price, the picture is more nuanced than the alarmist headlines suggest, and investors have tools to capture AI upside while managing the attendant risks.

Tim Murray, a capital markets strategist at T. Rowe Price, framed the debate by asking whether “the AI revolution has turned into a bubble.” He acknowledged the surge in investor interest , Google searches about an “AI bubble” have spiked alongside lofty price/earnings ratios and substantial capital expenditure plans from hyperscalers , but argued that the episode differs materially from the late-1990s internet bubble. “Much of the valuation expansion in AI winners has been matched by equally strong earnings growth,” he wrote. “Current profitability levels go a long way toward supporting these valuations, assuming they can be maintained.”

T. Rowe Price’s analysis points to several structural reasons for greater confidence compared with the 1990s. According to the firm, leading AI investors such as Microsoft, Alphabet, Amazon and Meta enter the cycle with relatively low debt and robust credit metrics, and industry data show that earnings growth has, in many cases, kept pace with valuation expansion. That combination, the report suggests, makes the case for a more sustainable rerating , though it does not eliminate the risk that profitability could disappoint.

Investors have therefore been asking how to position portfolios in a market that may offer durable winners but also carries elevated dispersion and concentration risk. One answer, the T. Rowe Price research and subsequent commentary propose, is active management within exchange-traded funds. Active ETFs can provide targeted exposure to innovation while retaining the flexibility to change course if fundamentals deteriorate.

T. Rowe Price points to its own T. Rowe Price Technology ETF (TTEQ) as an example of that approach. The firm launched the thematic, actively managed ETF on NASDAQ on October 24, 2024, and describes the vehicle as holding a high‑conviction portfolio of 40–50 global technology names with an opportunistic mandate across technology‑enabled subsectors. The fund charges 63 basis points and, T. Rowe Price says, can move between “AI on” and “AI off” modes depending on valuation and fundamental signals; the fund’s manager, Dom Rizzo, has discussed that flexibility in interviews with industry publications.

Market observers note the trade‑offs. Passive technology ETFs offer low cost and pure exposure to the largest winners, but they can become heavily concentrated in a few names at the top of the market. Active and thematic funds, by contrast, aim to exploit a broader opportunity set and to manage downside by rotating away from overvalued stocks or subsectors. Industry commentary highlights that these benefits depend on manager skill and that active fees and turnover can erode returns if execution falls short.

There are also macro and execution risks that could turn a durable secular shift into a painful drawdown for investors. Heavy capital expenditure by hyperscalers to build data centres and custom chips has supported demand for AI-related suppliers, but it also increases the stakes: if spending proves less persistent than expected, earnings growth could slow and valuations could re-rate. Conversely, continued productivity gains and new commercial applications would strengthen the bull case.

For now, the debate reflects a broader tension in markets: technological revolutions can produce both transformative corporate profits and headline-grabbing speculation. According to the T. Rowe Price reports, the current expansion appears more grounded in earnings and balance‑sheet strength than the internet boom of the late 1990s, but the firm and other market participants caution that investors should remain attentive to fundamental signals. Active ETFs and selective exposure to technology leaders and innovative smaller names are presented as ways to participate in AI’s gains while retaining the ability to respond if the story shifts.