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Tech investor Dan Niles, founder and portfolio manager at Niles Investment Management, said the AI boom still has momentum but warned that AI-linked stocks could face a major pullback after an unsustainable surge in enthusiasm, capital spending, and market concentration.
Speaking on the Master Investor Podcast on Tuesday, Niles said he expects AI-related equities to decline by 30% to 50% in early 2027, following what he described as an overheated phase in the market.
Niles said that, from current levels, AI-linked stocks could drop sharply at the start of next year’s cycle and beyond. “What do I think happens to these stocks sometime early next year from wherever they get to? They probably go down 30% to 50%,” he said.
Other prominent investors have also cautioned that the AI rally may be overheating, though they have stopped short of forecasting a decline as large as Niles’s.
Niles’s view is that the AI boom is not over, but that the next phase will be more volatile. He said the industry is entering a new wave of demand driven by agentic AI, which can perform multi-step tasks rather than only responding to prompts.
He argued that this shift will require dramatically more computing power, which could help sustain the rally in the near term.
Niles said the market is still supported by AI enthusiasm and easier monetary conditions, but investors may be underestimating how quickly sentiment can change.
He also framed the current period as part of a longer buildout, saying, “We’re entering year four of this buildout,” and comparing the moment to 1997 and 1998 during the internet infrastructure boom rather than the dot-com peak in 2000.
Niles said semiconductors have already run hard and appear stretched after a major rally. While he said semiconductors remain attractive over the long term, he described the group as overbought in the short term and said a pullback would not surprise him.
On stock selection, Niles named Google as his top mega-cap pick for the next three to five years, saying it has the “full stack” of AI assets. He also cautioned that not every company tied to AI will be a winner.
His advice to investors was to stay flexible: “My advice would be just be nimble and don’t get too greedy on the way up,” he said. “Look at what happens, but then look at how the market reacts to what happens because that’s what’s important.”
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