IMHO I think the blast radius is implicitly contained. The major investments are in data centres, and the current investment cases impute near zero residual value after five years. Meaning that current valuations already assume "catastrophic" declines in equipment valuation. This is unusually clear-eyed and sober investment calculus in the tech space.
Further, unlike during the dotcom crisis, most of this spending is not driven by debt. It's mostly funded by the large companies which are producing enormous revenue and profit to pay for this. It's an order of magnitude different.
The major question mark on these valuations is the revenue assumptions, which can be reasonably criticised. A bear case here is that revenue growth is not as aggressive as projected, and valuations steadily decline over time. I don't see a likely scenario where the entire sector collapses. There is no apparent cascade failure mechanism. Of course, these mechanisms aren't always immediately clear prior to crashes.
We must remember that all of the models coming out of China are presumed to be distilled frontier models. Meaning a) they will always be x days/weeks/months behind the frontier models, b) they will never be quite as good, c) inference will generally be constrained by compute capacity (especially as the frontier studios have an incentive to capitalise on their moat), meaning Chinese studios will always be at a disadvantage.
The real wildcard here is self-improvements. It looks like we're already in the singularity, meaning a large proportion of LLM development is already done by LLMs. The development cycle on these might be months now, but it will be weeks soon. Days within a year, then hours, minutes, seconds, and milliseconds. It's impossible to predict what this curve looks like.