Last week, on the short walk to pick the kids up from after-school club, I bumped into one of the other dads. After the usual small talk about football practice and forgotten lunch boxes, he asked how the markets were doing. You could tell from the way he asked the question that there was some anxiety behind it. I don’t give investment advice on the school run, but I’m always happy to share what I’m seeing in markets.

So today I thought I would answer this question properly: what is the difference between a market correction, a bear market and a bubble? Understanding the distinction helps us stay calm when headlines do their best to unsettle us.

Where does Nvidia fit? Is artificial intelligence a bubble?

Interestingly, even after posting trading results last week that beat forecasts, Nvidia finished the day lower. This tells us something important about where we are in the artificial intelligence (AI) journey. The companies building AI models are discovering that they need far more computing power to unlock the benefits. Buying Nvidia’s high-powered processing chips, which can perform millions of functions in parallel, is not enough. They also need the electricity and infrastructure to run their AI technology at full strength.

AI today is like the first generation of smartphones. Early smartphones could browse the web, take photos and play games, but everything was slow and the batteries drained very quickly. The potential was obvious, but the hardware was not ready.

Only when the infrastructure caught up – faster processors, more memory, better batteries and stronger networks – did the real smartphone revolution begin. Maps, video calls, mobile banking, social media, streaming and cloud computing all came later.

We believe AI is at the same point. The potential is visible, but the infrastructure needs to scale up dramatically. As well as high-powered chips, the AI revolution needs more data centres and huge amounts of electrical power.

This is why Nvidia’s results matter, but don’t automatically send markets soaring. The industry knows what it wants to build. Now it needs the infrastructure to turn that vision into reality.

Why we see an opportunity

While we’ve seen a pullback in AI-related shares, we don’t see this as a bubble bursting. We see growing pains, the same kind that have happened before every major technology shift. For long-term investors, this looks more like Black Friday sale pricing than a reason to panic. We’re drawing up a shopping list, not running for the exits.

I like the chart below because it highlights an important reality. Over the past 25 years, US equities (as measured by the S&P 500 index) have fallen by an average of 16% at some point in each year. This is the largest peak-to-trough drop during those 12 months – the ‘maximum drawdown’. This might sound alarming, but here’s the surprising part – despite these temporary falls, the market bounced back to finish with a positive return in 18 out of those 25 years. That’s more than 70% of the time. Just last year, the market fell over 8% during the year, only to finish up more than 23%.

Key Takeaway

Whether a client is feeling nervous about markets or thinking about how Budget tax changes might affect their investments, the expertise of a financial adviser can prove invaluable. A market correction and a bubble can look surprisingly similar in the moment, but confusing one for the other can be costly. A good adviser helps their client stay invested through the noise, keeping long-term goals front and centre, and ensuring they’re positioned not just for today’s headlines – but for the years ahead.

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This article is provided for general information purposes only and should not be construed as personal financial advice to invest in any fund or product. These are the investment manager’s views at the time of writing and should not be construed as investment advice. The opinions expressed are correct at time of writing and may be subject to change. Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.