Crystal Ball: Will the AI bubble burst or balloon in 2026?

Our first topic is one you know, love, and perhaps fear: AI. For the last few years, every year has been declared the year of AI. But 2025 was especially undeniable: The discourse around AI truly moved from boardrooms to kitchen tables. And we got comfortable, more or less, saying that there is an AI bubble.

The question, of course, is what happens now. How big is that bubble? What areas of AI are actually bubbly? And which companies have staying power, when all is said and done? Here’s what Term Sheet’s human readers think 2026 has in store. 

Note: Answers have been edited for clarity and brevity.

The AI bubble

The AI hype cycle will pop. 2026 marks the end of AI novelty purchasing. Companies will only pay for AI that increases revenue, reduces churn, or automates real work. The bar moves from impressive demos to measurable ROI. —Stevie Case, Vanta chief revenue officer

A lot of AI valuations will take a markdown, squeezing compensation for AI researchers at tier-one startups. The best AI companies will continue to succeed but maybe not at the extent that they’d thought. —Deedy Das, Menlo Ventures principal

For AI buyers, 2026 will be the year of ROI. The shine of “pure potential” is wearing off, and budgets will increasingly flow to products that prove value, not just promise it. —Meera Clark, Redpoint Ventures partner

The AI bubble debate will rage on. —Jai Das, cofounder, president and partner, Sapphire Ventures

AI will need to prove itself in the numbers. —Anthony Georgiades, Innovating Capital founder and general partner

The AI funding bubble will burst when short-term investors exit. The math is simple: $200 billion invested in a single year must produce multiple trillion-dollar companies within five years—outcomes that historically take decades. Investors are being given 48 hours to decide whether to invest tens of millions into a company. That time compression tells you everything about a potential bubble. —John Kim, Sendbird cofounder and CEO

By the end of 2026, the financial markets will begin to reckon with the realities of AI business models and capital will begin shifting away from the “spend at all costs” approaches of hyperscalers and foundation models. The receding tide will result in reduced valuations in 2027 in both public and private markets. —Nnamdi Okike, cofounder and managing partner, 645 Ventures

In 2026, the AI popular narrative will pivot hard from the “God model” view to the “menagerie of models’ view. Rather than one top lab with a single “God model” dominating, there will be a plethora of thousands to millions of specialized models, distillations, fine-tunes occupying various “ecological niches.” —Jared Quincy Davis, CEO and founder of Mithril

Vertical AI becomes the survivor class of the AI cycle. If the AI bubble deflates in 2026, the companies that survive will be vertical AI platforms with real margins, real customers, and real proprietary data. —Francisco Martin-Rayo, Helios AI cofounder and CEO

Sorry SF, those AI billboards aren’t going anywhere, but they will tell an interesting story next year. The freeway will act as a live scoreboard for the sector. With thousands of AI companies fighting for oxygen, the ones that stay visible—literally—might be the ones still standing. —Merrill Lutsky, founder and CEO, Graphite

Boring incumbents will steal the AI spotlight in 2026. The last two years were about who could build the biggest model. 2026 will be about who owns the weirdest, deepest, messiest data. —Fred Hoch, TechNexus Venture Collaborative cofounder and general partner 

The application layer 

Consumer AI slop backlash will lead social networks to crack down and add more guardrails around AI-created accounts and content. —Amy Wu Martin, Menlo Ventures partner

The value in AI will accrue to companies that control real workflows, real assets, and real data—not those sitting at the thin application layer. —Patrick Chun, founder and managing partner, Juxtapose

In-person connection will become a premium product category. In an AI world, real human connection will become more scarce and more valuable. Consumers and workers alike are yearning to build deep relationships. We’ll see an explosion of companies that enable richer in-person experience. —Peter Deng, general partner, Felicis

AI will earn a mixed reputation in mental-health care: hopeful, powerful—and unsettling. Its unpredictability will force a reset on where and how it’s safely used. —Liam Donohue, cofounder and managing partner, 406 Ventures

In 2026, AI products will finally cross the uncanny valley and become the new normal in many instances of human engagement. —Rudina Seseri, founder and managing partner, Glasswing Ventures

Foundation models are fine; the application layer is doomed. The juggernauts (Anthropic, OpenAI, DeepMind) are likely appropriately valued or even undervalued and will continue succeeding. The real bubble risk is in the application layer, where there are now a dozen companies doing AI-powered accounting, for example. —Kamran Ansari, Infinity Ventures venture partner and Kapital Ventures founder and managing partner

AI will dissolve the boundary between finance and operations. 2026 is no longer about models giving advice, it’s about models actually executing, within guardrails. —David Roos, Core Innovation Capital partner

Consumers will prefer AI customer service reps over humans. In 2026, a patient calling their health insurance or a traveler calling their airline will prefer to deal with an AI, instead of getting routed to a human. —Jon Keidan, founder and managing partner, Torch Capital

Agents and LLMs

2026 will mark the end of the ‘bigger is better’ era in AI. LLM and AI Agent memory will improve dramatically, allowing small, specialized models with long-term memory to replace bloated LLMs in many agentic systems. —Scott Beechuk, partner, Norwest 

2026 will undoubtedly be the year of the agent. —Stefan Miedzianowski, DeepL chief scientist

In 2026, the practical applications of agentic AI will overtake the promise of prompt-based generative AI in delivering real value to B2B enterprise applications. —Richard de Silva, founder and managing partner, Lateral Investment Management

This is the year open-source models become good enough. You don’t need to be at the frontier; for selective applications, you will start seeing a larger variety of models being used. This will make running models more cost-efficient, spurring new entrants and broader AI investment across the ecosystem. —Zach Lloyd, founder and CEO, Warp

Some 90% of AI agents fail within 30 days of deployment. The companies that succeed will be those with the best human-AI collaboration frameworks. Autonomous agents lead to more human oversight, not less. —Phelim Bradley, cofounder and CEO, Prolific

See you tomorrow, 

Allie Garfinkle
X: @agarfinks
Email: alexandra.garfinkle@fortune.com
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PRIVATE EQUITY

– Galileo Education, a portfolio company of Millpond Equity Partners, acquired Putnam Classical Academy, a Palatka, Fla.-based private school and New Generation Christian School, a Lake City, Fla.-based private school. Financial terms were not disclosed.

EXITS

– Stonepeak agreed to acquire a majority stake in Castrol, a Berkshire, U.K.-based engine oils, industrial fluids, and greases manufacturer, from BP for $10.1 billion. 

– TransDigm Group agreed to acquire Stellant Systems, a Torrance, Calif.-based designer and manufacturer of radio frequency and microwave amplification products, from Arlington Capital Partners, for $960 million.

– VSE Corporation acquired Aero 3, a Bedford, N.H.-based maintenance, repair, and services provider for aircraft wheels and brakes, from GenNx360 Capital Partners, for $350 million.

– Advance Technologies System agreed to acquire Conexus, a Rome, Italy-based designer, constructor, and maintainer of power transmission and distribution infrastructure, from Mutares. Financial terms were not disclosed.

– Michelin agreed to acquire Tex-Tech Industries, a Kernersville, N.C.-based designer and manufacturer of textiles and fabrics for the aerospace, space, and defense & security industries, from Arlington Capital Partners. Financial terms were not disclosed.

OTHERS

– Legence Corp. acquired The Bowes Group, a Beltsville, M.D.-based provider of mechanical, plumbing, and process system solutions, for $325 million. 

– MetLife Investment Management acquired PineBridge Investments, a New York City-based asset manager. Financial terms were not disclosed.