Why Wall Street isn't hopping off the AI bubble just yet

Data: Financial Modeling Prep; Chart: Axios VisualsWall Street strategists busted into 2026 overwhelmingly bullish, with one big caveat: AI had to deliver measurable returns this year. Why it matters: Two weeks in, investors are getting their wish, as Alphabet is lending its AI horsepower to several companies, while much of its risk is in the rearview. What they're saying: Having real world, tangible applications for AI is a "very big deal," Trevor Slaven, global head of asset allocation at Barings, told Axios. Slaven thinks the market could rally significantly (again) this year, but there will be volatility along the way.Continued questions about an AI bubble could weigh on the tech sector, and mixed policy from Washington could cause broader volatility even if stocks continue to grind higher.State of play: Alphabet's market cap hit $4 trillion Monday after two major partnerships were announced. Apple confirmed it would use Alphabet's large language model, Gemini, to run Siri, and Walmart will use Gemini as part of an AI-powered shopping effort.Flashback: Alphabet's stock was under pressure throughout early 2025 as investors worried about headwinds ranging from an antitrust case to fierce competition from OpenAI and Anthropic. The company's market cap rose by over $230 billion after avoiding a DOJ breakup. Since last fall, investors have become more discerning about the winners and losers of the AI buildout, rewarding companies practicing responsible spending that can lead to measurable returns. That sentiment shift helped Alphabet become the top-performing Big Tech stock of the year. Between the lines: Alphabet is showing investors the kind of real-world, measurable AI-application-goodness Wall Street wanted to see this year. It's not just about companies using AI for new products that could drive revenue, but also to cut costs.Walmart's plan to expand AI-powered drone delivery "sounds like some cost-cutting," Slaven said. Companies that can use AI to create tangible returns or to cut costs could be set for rewards from shareholders this year. Yes, but: AI adoption allowing for fewer workers seems a "questionable" reason to be bullish, Bob Elliott, chief investment officer at Unlimited Funds, told Axios. The question that every AI interview I have with investors these days seems to end with: Will AI create new jobs, or take them all away? If AI can replace workers, that's good for investors, who benefit from expanded profit margins and earnings growth, but potentially bad for the economy, if fewer people are working, earning and spending. What we're watching: How the AI-economy plays out this year. Investors are happy to hold off on their existential AI questions as long as earnings can expand throughout 2026. The bottom line: There's an underlying acknowledgment from Wall Street that the AI rally is looking bubbly, Jennifer Bender, global chief investment strategist at Jane Street, told Axios.But Wall Street doesn't want to hop off the AI train too early, especially right as companies are adopting the technology, potentially boosting their earnings, and profits for investors.