The artificial intelligence market is expected to split into distinct segments in 2026, as investors move away from broad-based optimism and begin to differentiate between companies spending heavily on AI and those generating returns from that spending.
Market Volatility Signals Shift In Investor Focus
The final quarter of 2025 saw sharp swings in technology stocks, driven by circular funding deals, rising debt issuance, and elevated valuations that reignited concerns about an AI-driven bubble. According to Blue Whale Growth Fund chief investment officer Stephen Yiu, that volatility may signal a change in how investors assess AI exposure.
Yiu told CNBC that many investors, particularly retail investors gaining exposure through exchange-traded funds, have so far treated AI-linked companies as a single category. He said the market has largely failed to distinguish between firms with AI products but limited revenue models, companies burning cash to fund infrastructure, and those benefiting financially from AI-related spending.
Three Emerging Camps In AI
Yiu said he expects the market to separate AI companies into three broad groups: private startups, listed AI spenders, and AI infrastructure providers.
Private AI companies, including OpenAI and Anthropic, attracted $176.5 billion in venture capital during the first three quarters of 2025, according to data from PitchBook.
At the same time, large technology companies such as Amazon, Microsoft, and Meta are spending heavily on AI infrastructure. That spending is flowing to suppliers including Nvidia and Broadcom.
Valuations And Cash Flow Pressures
Blue Whale Growth Fund assesses companies by comparing free cash flow yield with stock prices to evaluate whether valuations are supported by underlying earnings. Yiu said most companies in the so-called Magnificent Seven are now trading at a substantial premium after accelerating AI investment.
He said his firm prefers exposure to companies receiving AI-related spending rather than those funding it, noting that the financial impact of heavy capital expenditure could weigh on margins if revenue growth fails to keep pace.
Froth Concentrated In Specific Segments
Barclays Private Bank and Wealth Management chief market strategist Julien Lafargue told CNBC that speculative activity in AI is concentrated in certain areas rather than across the entire market.
Lafargue said the higher risk lies with companies benefiting from AI-related enthusiasm but not yet generating earnings, pointing to some quantum computing firms as examples. He said investor positioning in those cases appears driven more by expectations than by financial results.
Business Models Become More Capital Intensive
The need for differentiation reflects broader changes in large technology companies’ business models. Firms that were once asset-light are increasingly investing in data centers, power infrastructure, land, and specialized chips to support AI development.
Companies such as Meta and Google now operate as hyperscalers, with risk profiles closer to infrastructure-heavy businesses than traditional software companies.
Schroders head of multi-asset income Dorian Carrell said valuing these firms as low-capex software businesses may no longer be appropriate, particularly as funding strategies for AI expansion remain uncertain.
Debt Funding And Margin Risk
Technology companies increasingly tapped debt markets in 2025 to fund AI infrastructure, though investors remain cautious. Quilter Cheviot global head of technology research Ben Barringer told CNBC that companies such as Meta and Amazon remain net cash positive, distinguishing them from firms with more constrained balance sheets.
Carrell said private debt markets are likely to play a larger role in 2026.
Yiu said that if incremental AI revenue does not exceed rising costs, profit margins will come under pressure. He added that depreciation of hardware and infrastructure has yet to fully appear in company profit and loss statements but will increasingly affect financial results from 2026 onward.
Featured image credits: Freepik
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