When Expectations Outpace Reality

Valuation Cycles and Risk Management – Q3 2026

New tech­no­lo­gies reshape the future. Yet the expec­ta­ti­ons placed on them often deve­lop faster than their econo­mic reality. History shows that major inno­va­tions first spark enthu­si­asm and high valua­tions, long before their true econo­mic value has fully unfolded. Over time, expec­ta­ti­ons and reality realign, the eupho­ria fades and valua­tions norma­lise – while the inno­va­tion itself endures.

The inter­net chan­ged the world profoundly. Even so, many of its even­tual winners lost more than 80 per cent of their market value during the dotcom correc­tion before their busi­nesses grew into those valua­tions years later – while nume­rous others disap­peared from the market altog­e­ther. Innovation and valua­tion rarely move at the same pace.

For the present, this yields an important obser­va­tion. Market correc­tions do not arise solely in phases of econo­mic weak­ness or rece­s­sion. They can equally occur when expec­ta­ti­ons rise faster than econo­mic reality. In such phases it is not the inno­va­tion that is called into question, but its valuation.

High valua­tions do not inevi­ta­bly lead to falling markets. They do, howe­ver, alter the balance between oppor­tu­nity and risk: the remai­ning upside narrows, while the down­side in the event of disap­point­ment widens. This does not mean a correc­tion is immi­nent. It means, rather, that the start­ing posi­tion has changed.

Precisely this tension between inno­va­tion, expec­ta­ti­ons and valua­tions can be obser­ved in every major tech­no­lo­gi­cal phase. The current AI invest­ment cycle is no exception.

A Current Example

The long-term poten­tial of arti­fi­cial intel­li­gence is beyond question. At the same time, the question arises whether the pace of invest­ment and the expec­ta­ti­ons atta­ched to it have, in certain areas, alre­ady been partly anticipated.

This is evident in a mecha­nism recently discus­sed as the AI finan­cing loop. Put simply, some large chip and cloud provi­ders invest in AI compa­nies. Part of this capi­tal then flows back, as those same compa­nies purchase compu­ting power and chips from precis­ely these provi­ders. This gives rise to capi­tal flows that partly circu­late within the same value chain. A compa­ra­ble pattern emer­ged around the turn of the mill­en­nium in the tele­com­mu­ni­ca­ti­ons sector, when equip­ment makers helped finance the growth of their own custo­mers – until demand fell short of expec­ta­ti­ons and these inter­de­pen­den­cies unwound.

Part of the repor­ted growth thus rests on capi­tal flows within the same ecosy­stem. As long as these invest­ments conti­nue, the mecha­nism persists. Should it slow, growth expec­ta­ti­ons may adjust accordingly.

Estimates from various market analy­ses suggest that the mutual finan­cing and invest­ment inter­de­pen­den­cies accu­mu­la­ted to date amount to well over US$800 billion. Measured against the US equity market as a whole, this figure appears modest at first. What matters, howe­ver, is less the abso­lute amount than the concen­tra­tion of this capi­tal in a small number of compa­nies that today shape a signi­fi­cant part of index perfor­mance. In the event of disap­point­ment, what would prima­rily be repri­ced there is not a single sum, but the growth narra­tive that under­pins these valuations.

The AI invest­ment cycle is ther­e­fore less a fore­cast than a current exam­ple of how expec­ta­ti­ons, capi­tal flows and valua­tions can inter­act. Whether a future repri­cing actually origi­na­tes there or is trig­ge­red by other deve­lo­p­ments remains open. The under­ly­ing mecha­nism, by contrast, is timeless.

Known Risks Are Not Automatically Priced In

The real chall­enge ther­e­fore lies less in the risk itself than in how it is inter­pre­ted. The rela­ti­on­ships descri­bed have long been known and are widely discus­sed. To conclude from this that they are alre­ady fully reflec­ted in valua­tions would be prema­ture. Being known and being priced in are two diffe­rent things.

Capital markets have repea­tedly shown that risks do not lose signi­fi­cance simply because they are talked about. What matters, rather, is how expec­ta­ti­ons, valua­tions and the beha­viour of market parti­ci­pants inter­act. As long as these do not change, the start­ing posi­tion too remains largely unchanged.

In phases of great confi­dence in parti­cu­lar, a high concen­tra­tion on a few themes or compa­nies often emer­ges. In itself this is neither unusual nor proble­ma­tic. Yet the more one-sided expec­ta­ti­ons become, the more sensi­tively valua­tions react to disap­point­ment – not because the long-term pros­pects funda­men­tally change, but because a great deal of good news had alre­ady been taken for granted.

Here lies the real heart of the matter. A surpri­sing event finds market parti­ci­pants differ­ently posi­tio­ned: some are expo­sed, others hedged, still others stand on the other side and buy. The pres­sure is disper­sed. With a widely known risk, the reverse holds. Because ever­yone shares the same assess­ment yet remains inve­sted, most are posi­tio­ned in the same direc­tion – on the same side, in the same few compa­nies. Should that assess­ment change, it is not indi­vi­dual parti­ci­pants who wish to sell, but nearly all at once. And when ever­yone tries to leave through the same door at the same time, there is no one on the other side to buy. The market then falls not in an orderly fashion, but abruptly. This is precis­ely why, under one-sided posi­tio­ning, even small shifts in expec­ta­ti­ons can trig­ger dispro­por­tio­na­tely large movements.

The current AI invest­ment cycle illu­stra­tes this inter­play to a parti­cu­lar degree. It combi­nes high expec­ta­ti­ons, excep­tio­nal invest­ment and a strong concen­tra­tion of capi­tal flows in a few compa­nies – exactly the condi­ti­ons under which one-sided posi­tio­ning can arise.

Concluding Thoughts

New tech­no­lo­gies will conti­nue to drive inno­va­tion, produc­ti­vity and econo­mic progress. Of that there is little doubt. Equally, there is much to suggest that capi­tal markets will, in future too, repea­tedly expe­ri­ence phases in which expec­ta­ti­ons run ahead of econo­mic reality and valua­tions adjust accordingly.

For inve­stors, the chall­enge ther­e­fore lies less in predic­ting the next turning point. What matters more is to reas­sess expec­ta­ti­ons, valua­tions and risks on an ongo­ing basis and to draw decis­i­ons from this with the neces­sary discipline.

A norma­li­sa­tion of valua­tions would, from this perspec­tive, be no extra­or­di­nary deve­lo­p­ment, but part of a recur­ring market mecha­nism. Innovation and valua­tion rarely move at the same pace – and ther­ein lies the chall­enge of long-term risk management.

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