From AI Bubble to Market Crash: How Big Is the Domino Risk?
- 13 hours ago
- 5 min read
Throughout 2026, the world has already seen several times how euphoria over artificial intelligence (AI) can crack within days. In late June 2026, worries about an AI bubble triggered a global sell-off: the Nasdaq Composite plunged more than 4% in a single session due to a drop in semiconductor stocks. A month later, South Korea’s Kospi index fell about 40% over roughly 40 days as Samsung Electronics and SK Hynix tumbled more than 13-14% in a day.
If this euphoria truly reverses, how far could the impact spread to global and domestic markets?
When One Sector Dominates, the Market Gets Fragile
AI has become one of the largest investment sectors in global markets in recent years. Companies across its entire ecosystem—from semiconductor makers and cloud providers to AI model developers—have received outsized attention and premium valuations from investors.
The problem is that when one sector becomes too dominant, index performance becomes heavily dependent on a handful of large-cap stocks. When those stocks rise, the index is pulled up with them; the reverse is just as true. The sharp correction began with a repricing of semiconductor valuations that had grown too high, not from any business failure, since both Nvidia and AMD actually posted revenue and profit above expectations in their latest quarter, with forward projections that remained strong.
AI doesn’t have to fail for its stocks to fall. Growth that merely comes in below expectations, concerns about the sustainability of data-center capital spending, or simply profit-taking amid extreme valuations, can already trigger a sharp price correction.
Does a Bursted Bubble Always End in a Market Crash?
The terms bubble, correction, bear market, and market crash are often used interchangeably, even though they carry different meanings.
Correction generally refers to a relatively limited market decline that still falls within a normal market cycle. A bear market, meanwhile, describes a deeper and longer-lasting decline.
A market crash typically refers to an extremely fast and sharp price drop, often accompanied by panic and liquidity stress. Because of this, the bursting of a bubble does not automatically result in a market crash.
A correction in AI stocks can occur simply because investors are engaging in profit-taking. However, the situation can become more serious if the price decline triggers a broad shift in expectations.
For instance, investors may start questioning whether AI investment is truly generating returns commensurate with the capital deployed. If that doubt spreads, investors may begin cutting their exposure to the technology sector as a whole. The biggest risk emerges when the sell-off is no longer based on the fundamentals of specific companies but turns into broad market panic.
Three Easy Scenarios If AI Stocks Reverse Course
Limited Correction
AI stocks fall significantly because valuations are seen as too high, but global economic fundamentals remain strong. Investor funds rotate into defensive sectors such as consumer staples, healthcare, or utilities. The impact on global markets is relatively limited, similar to the quick-recovery pattern seen in semiconductors throughout June 2026.
AI-Related Sector Crash
The decline spreads across the entire tech sector. Companies cut capital spending as AI demand weakens, dragging down chip, server, and data-center suppliers. Throughout July 2026, for example, the Philadelphia Semiconductor Index (SOX) corrected more than 20% from its peak and entered bearish territory, even though on a year-to-date basis the index still posted a gain of nearly 65%, far outpacing the S&P 500—illustrating that a “sector crash” can occur amid a long-term trend that remains positive.
Global Market Crash
Investors no longer sell only tech stocks but reduce risk assets across the board. Global equities fall, credit spreads widen, liquidity tightens. At this point, the AI issue is no longer just a sector problem but a crisis of confidence in the stability of global markets as a whole—the most extreme scenario, which has not yet occurred throughout 2026, though its triggering elements (extreme valuation concentration, private-credit financing behind data centers, geopolitical tension) remain worth watching closely.
From Wall Street to Global Markets: How Does the Domino Effect Happen?
A fall in the U.S. stock market affects emerging markets (including Jakarta Composite Index, aka Indonesia’s IHSG) through financial networks and investor behavior, not merely through direct business ties. The main channels include.
Risk-off Sentiment: Global investors reduce risk assets and shift them into perceived safer assets, putting pressure on emerging-market stocks even when domestic fundamentals remain healthy.
Capital Outflow: Foreign investors withdraw funds from emerging markets to reduce risk or meet liquidity needs. In Indonesia, this pattern has been clearly visible: foreign investors recorded net sales of more than Rp53.97 trillion in the domestic stock market from the start of the year through early June 2026, in line with a correction in the IHSG that reached as much as 33% year-to-date at the time.
Exchange Rate: Demand for the U.S. dollar rises as investors seek safe assets, pressuring emerging-market currencies including the rupiah, which weakened past Rp18,000 per U.S. dollar in mid-2026.
Liquidity: In panicked market conditions, investors tend to sell their most liquid assets first. This can cause declines to occur simultaneously across various asset classes.
As such, the domino effect does not always occur because companies in Indonesia have direct ties with U.S. AI companies. This linkage can arise through global financial networks and shifts in investor behavior.
If the scenarios above unfold, Indonesia would face several follow-on pressures on the economic and capital-market fronts:
Weaker Export Performance: A global economic slowdown can affect Indonesia’s export outlook. If global economic activity weakens, demand for commodities and export products could come under pressure as well.
Capital Outflow: Foreign investors are one of the key drivers of Indonesian stock market movements. When global pressure occurs, foreign investors may reduce their exposure to risk assets in emerging markets. If large outflows of funds occur, large-cap and liquid stocks could come under pressure first. However, the size of capital outflow does not always single-handedly determine the direction of the IHSG. Domestic investors, government policy, economic conditions, and corporate performance remain important factors.
Rupiah and Bond Volatility: Beyond a weaker rupiah, investors will adjust their bond portfolios in response to interest-rate expectations, amplifying volatility in domestic financial markets.
Between a Real Threat & an Exaggerated Risk
While the combination of pressure on stocks, exchange rates, and bonds can amplify financial market volatility, the IHSG’s movement does not always follow a Wall Street collapse. Cross-market correlation can indeed rise during a global crisis, but each country’s fundamental conditions differ. As long as domestic consumption remains strong, corporate balance sheets are healthy, and economic policy can maintain stability (including technical factors such as credit-rating affirmations from global rating agencies), the IHSG may come under pressure but won’t necessarily fall as deeply as the U.S. market. In other words, Wall Street can be a trigger for sentiment, but it is not the sole determinant of the IHSG’s direction.
The risk of an AI bubble bursting does indeed deserve attention. However, keep in mind that AI is a technology with the potential to boost productivity and create new business models. Because of that, part of the rise in tech company valuations may reflect expectations of future growth.
Problems arise when those expectations grow far faster than companies’ ability to generate revenue and profit. This is where investors need to distinguish between two things: the technology’s outlook and the price of the asset. AI can be a hugely successful technology, but that doesn’t mean every AI-related stock will always rise. Likewise, a decline in AI stocks doesn’t automatically mean AI technology has failed.
Disclaimer: This content is created for educational purposes or service promotion, and does not constitute a recommendation to buy or sell any specific Securities. Any risks arising from investment decisions made based on the information in this publication are the sole responsibility of the respective audience. The data was sourced from various sources. PT KAF Sekuritas Indonesia is licensed and supervised by the Financial Services Authority (Otoritas Jasa Keuangan / OJK).
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