Whenever a new technology excites investors, the same question appears: is this real growth or a bubble? It was asked about railways in the 1800s, the internet in the late 1990s and many themes since. Artificial intelligence is the latest. Nobody can say for certain whether AI-linked shares are overvalued, but investors can learn how to tell the difference between hype and real earnings. This article explains what a bubble is, the signs people watch, and how to use simple measures such as the price-to-earnings ratio to judge expectations.
What a market bubble is
A bubble happens when prices rise far above what the underlying businesses can realistically earn, driven mainly by excitement and the belief that prices will keep rising. People buy because prices are going up, which pushes prices up further, until something breaks the confidence and prices fall sharply.
A key point: a technology can be real and important while its shares are still overpriced. The internet changed the world, yet many internet shares fell sharply after 2000, and some companies disappeared entirely. The technology succeeded; many of the share prices of that time did not hold.
Signs investors watch for
Prices rising much faster than earnings. If share prices double while profits barely change, the market is paying more for the same earnings, betting heavily on the future.
Very high valuations across a whole theme. When many companies in one theme trade at unusually high price-to-earnings or price-to-sales ratios at the same time, expectations are stretched.
Companies adding the theme to their name or story. When businesses suddenly describe themselves as part of the hot theme, and their shares jump on the announcement alone, excitement may be running ahead of substance.
Heavy borrowing to buy shares. Rising use of borrowed money to invest can amplify both gains and falls.
"This time is different." When people argue that old valuation rules no longer apply, history suggests caution.
Huge spending without clear returns. If companies spend vast sums on a technology before it produces matching revenue, investors eventually ask when the payback will come.
Signs of real, earnings-backed growth
Revenue and profit growing alongside prices. When earnings rise quickly too, high prices can be partly justified.
Customers paying and coming back. Real demand shows up as recurring revenue, growing order books and customers expanding their spending.
Strong cash flow. Profits turning into actual cash, not only accounting gains, suggest a sound business.
Reasonable valuations compared with growth. A company growing earnings very fast can justify a higher P/E than a slow grower; the question is whether the price matches the realistic growth.
Using P/E to judge expectations
The price-to-earnings (P/E) ratio divides the share price by earnings per share. It tells you how many rupees or dollars investors are paying for each unit of yearly profit. A P/E of 20 means paying 20 times one year's earnings.
A high P/E is not automatically bad. It means investors expect earnings to grow a lot. A useful exercise is to ask: what growth would make this price reasonable? If a company has a P/E of 100 and its earnings double every year for several years, its P/E on future earnings falls quickly. If growth disappoints, the price has a long way to fall.
Other measures help too. Price-to-book (P/B) compares price with the company's net assets. Price-to-sales is used when profits are small or negative. Comparing these with the company's own history and with peers shows how unusual today's valuation is.
Example on PositoAI: AMD
AMD, listed in the US, designs processors and graphics chips for computers, gaming consoles and data centers, and is one of the companies building chips for AI. Its share price has moved strongly with AI expectations. On the date below, its P/E was well above that of the average large company, which shows how much future growth the market was building into the price. Whether that growth arrives is what future results will show; the P/E tells you the size of the expectation, not the answer.
On PositoAI (18 Oct 2026): Positivity Score 15,384, ranked #3,232 of 3,999 companies in the US and #5,341 worldwide; market cap about ₹81.8 lakh crore; P/E 134.9; P/B 12.84. These figures change daily.
Why timing is so hard
Even when valuations look stretched, prices can keep rising for a long time. Many investors who correctly judged past bubbles lost money by acting too early. Others assumed high prices would last and were hurt when they fell. The lessons many long-term investors draw from past bubbles are to understand what they own, not to buy only because of a theme, to spread risk across different companies and sectors, and to be wary of borrowing to invest in fast-moving themes.
Common misconceptions
"If the technology is real, the shares can't be a bubble." History shows the technology and the share prices can follow different paths.
"A high P/E always means a bubble." Fast-growing companies can deserve high P/E ratios; the question is whether growth will match expectations.
"Bubbles are easy to spot in hindsight, so they're easy to spot now." In real time, the evidence is mixed and opinions differ widely.
"When a bubble bursts, every company in the theme fails." Strong businesses often survive and grow; it is the prices, and the weaker companies, that suffer most.
Frequently asked questions
Is AI in a bubble?
No one knows for certain. Some AI-linked companies have strong earnings growth, while others trade mainly on expectations. Each company needs to be judged on its own numbers.
What is a "good" P/E?
There is no single number. It depends on growth, risk, industry and interest rates. Comparing with peers and history is more useful than a fixed rule.
What was the dot-com bubble?
A period in the late 1990s when internet-related shares rose to extreme valuations, followed by a sharp fall from 2000 onwards.
How can I reduce the risk of buying into hype?
Look at earnings, cash flow, debt and valuation, diversify, and avoid decisions driven by headlines or tips.
How to use this on PositoAI
Check P/E, P/B and the Positivity Score of any AI-linked company on PositoAI, such as AMD, Nvidia or Microsoft, and compare them with peers using Compare. Use Go Deep to see whether revenue, profit and cash flow are growing alongside the share price. PosiStep 15 of PosiCourse, PositoAI's free stock market course, explains whether a stock looks cheap or expensive, and PosiStep 18 covers FOMO and risk.
Suggested reading
What Are AI Stocks? · AI Chips Explained · Semiconductor Stocks Explained · Can AI Predict the Stock Market? · Bull Market vs Bear Market · What Is Diversification?
Summary
A bubble occurs when prices rise far above what businesses can realistically earn, driven by excitement. A technology can be real while its shares are overpriced, as the internet era showed. Signs of a bubble include prices outrunning earnings, stretched valuations across a theme, companies riding the theme in name only, heavy borrowing and "this time is different" arguments. Signs of real growth include rising revenue, profit and cash flow and valuations that match realistic growth. The P/E ratio shows the size of the market's expectations, and comparing it with growth, history and peers helps separate hype from earnings.