The Rise of the AI Bubble Theory, What Is Driving Market Expectations for a Year-End Rally?

The world has entered the era of the Big Government. In the past, during the age of small government, the market drove innovation while the government remained a regulator. Today, the roles have reversed. Governments now set the direction of industries, and capital naturally follows. We are living in what can rightly be called the era of state capitalism.

In this environment, nations no longer trust the “invisible hand.” Strategic sectors such as artificial intelligence, semiconductors, energy, and defense are no longer driven purely by market forces—they are products of state decisions and public investment.

The United States is the clearest example of this transformation. The Biden administration’s CHIPS Act and Inflation Reduction Act (IRA)—building upon the protectionist industrial policy that began under Trump—have effectively shaped the framework of an AI national project. In this system, government spending and incentives themselves have become the starting point of innovation. In other words, innovation today is not born from technology, but from the flow of government funding.

Thus, the direction of government spending determines the map of economic growth. When public money is funneled into power grids, cloud infrastructure, semiconductors, and AI networks, private capital follows. The explosive growth of the AI industry was not because private firms discovered new markets on their own, but because the state designated AI as the stage for the future, and capital naturally converged there.

However, the recent government shutdown abruptly halted this flow. This was not merely an administrative suspension—it was a pause in the machinery of national growth. With federal spending frozen, research grants, public contracts, infrastructure projects, and tax incentives were all put on hold. If the state is the engine of growth, then the shutdown was the moment that engine stopped. And in that instant, the market began to sense a fracture in the grand AI narrative.

That is precisely where the AI bubble theory originated. The market responds more to the flow of money than to the essence of technology. AI stock valuations had been built upon a simple narrative:

“A bright future → expanding investment → valuations still low.”

But once the shutdown froze investment, the narrative inverted:

“Investment halted → growth slowdown fears → valuation controversy → bubble debate.”

This phenomenon did not stem from technological failure but from a temporary pause in policy. AI’s long-term potential remained intact, yet without the flow of capital, the sector began to look less like a “future industry” and more like a “speculative bubble.” The market always moves with liquidity. Technology itself had not changed—but when the money stopped, confidence wavered. The so-called “bubble” was not a reflection of AI’s limits, but rather a psychological reaction to a brief freeze in the state-capitalist cycle.

Once the shutdown ends, however, the story changes entirely. The resumption of government spending will unleash a surge of delayed funds back into the economy. Backlogged research budgets, subsidies, and infrastructure projects will restart, and that money will flow directly into AI semiconductors, data centers, power systems, robotics, and mobility sectors. The moment the government turns the growth engine back on, capital will rush to follow.

The potential rebound of AI-related equities originates here. The next rally will not be driven by technological optimism but by the return of liquidity through the reactivation of policy mechanisms. Investors understand this well—AI is not a product of pure market innovation but a government-designed growth narrative. In that sense, the end of the shutdown represents not just an administrative reset, but the return of state capital and the removal of policy risk.

Moreover, the liquidity set to enter the market will not come solely from previously frozen funds. It will be amplified by upcoming rate cuts and Trump’s proposed $2,000 dividend payments to households. With fiscal and monetary expansion operating simultaneously, the market is likely to face an even greater wave of liquidity than before.

Importantly, this new liquidity will not concentrate solely among large corporations and institutional investors. Policy priorities are shifting toward middle-class welfare and small business support. Thus, unlike in past cycles where money was absorbed almost entirely by the “M7” giants—NVIDIA, Microsoft, Amazon, and others—this wave of capital is expected to spread across mid-cap AI firms, component suppliers, and infrastructure partners that had previously been overlooked.

This marks a structural shift—a redistribution of liquidity.In this context, K3 Lab maintains its core positions in the M7 but is gradually increasing exposure to mid-cap AI stocks and Ethereum (ETH). The expansion of AI infrastructure, combined with the potential approval of staking ETFs, positions Ethereum as a digital asset likely to benefit most directly from this liquidity wave.

Ultimately, the end of the shutdown is not just the reopening of government—it is the restart and redistribution of liquidity itself. As fiscal spending resumes, interest rates decline, and household dividends circulate, capital will once again rotate through the market, reigniting a new growth narrative. AI will sit at the heart of this cycle, with mid-cap AI stocks and Ethereum leading the charge.

When policy, monetary easing, and sentiment align in one direction, markets react faster than technology itself. And now, as the shutdown ends and rate cuts loom, that moment of reaction is drawing near.

In essence, we live in an era where the state engineers innovation. The shutdown was the moment that engine stalled; its end marks the signal that it’s roaring back to life. AI stands at the center of that reacceleration. Behind every bubble lies the rhythm of policy—and that rhythm is starting to move again.