Investor Brief: Are We in Bubble Trouble?

We wrote this piece less than a year ago: Investor Brief: You and Me and the Bubble Makes Three. While the constant barrage of headlines and geopolitical turmoil makes it feel like a decade has passed since November, the brief’s message remains intact: the current rally appears well-supported by fundamentals. We referenced the dot-com bubble for comparison and mentioned the difference in valuations between today’s hyperscalers and the dot-coms, illustrated here:

Are We in a Bubble? Valuations in Dotcom Bubble vs. Today

Forward P/E Ratios for Blue Chip Stocks in Dotcom Bubble vs. Today

Dotcom Peak – 3/24/2000

Source: ©Exhibit A, FactSet Research Systems Inc | Latest: 2026-08-06

This slide is for informational and illustrative purposes only. The data provided is believed to be accurate, but there is no guarantee of its accuracy, completeness, or timeliness. This is not a recommendation or offer of any financial product. Past performance is not indicative of future results, and investors should consider their own objectives and risk tolerance. Indices, if presented, do not include fees, are unmanaged, and not available for direct investment. Definitions & Methodology: The Forward Price-to-Earnings (P/E) Ratio for an index measures its current price relative to expected earnings of the companies within the index over the next 12 months. It’s calculated using consensus EPS estimates from FactSet. The chart shows the forward price-to-earnings ratio of select blue chip names at the dotcom bubble peak (3/24/2000) vs. today (assumed as the latest datapoint in the chart which is calculated as of the previous trading day’s close).

The primary difference is the robust level of earnings growth experienced by the current crop of AI-driven tech stocks. While many technology companies during the dot-com period traded at elevated valuations despite limited earnings power, today’s market leaders are generally supported by significant revenues, profits, and cash flow. This pattern looks different from a classic valuation bubble, where prices typically run well ahead of earnings. Here, earnings have been catching up to the story instead: second-quarter S&P 500 profit estimates were revised sharply higher as reporting season played out, and technology-sector earnings are expected to grow roughly 39% over the next twelve months, more than double the broader market’s pace. At the same time, higher long-term interest rates have raised the bar for what stocks need to earn to compete with lower-risk alternatives, which helps explain why valuations have come in even as prices have hit new highs.¹

Other indicators that may help alleviate concerns about a potential market bubble include the broadening market participation that we discussed in our recent Q2 2026 Investment Commentary and webinar. Not only are 493 members of the S&P 500 outperforming the Mag 7 year-to-date, but as seen in the table below, small caps are having a moment, along with international developed and emerging markets.² Yes, AI-related demand is a factor across all these asset classes, with SK Hynix and Taiwan Semiconductor in emerging markets, ASML (EAFE’s largest holding) in developed international, and a wide swath of chip-equipment, power, and networking names in small caps. But we believe it’s healthier that the AI buildout is lifting a broad, varied set of businesses rather than being confined to a handful of mega-cap platforms.

For periods greater than 1 year, returns are annualized. Source: Ycharts. See full disclosures.

That said, the spending behind this earnings growth deserves a closer look. The five hyperscalers building out AI infrastructure (Microsoft, Amazon, Alphabet, Meta, and Oracle) are on pace to spend more than $690 billion combined in 2026, an increase of over 80% year-over-year, according to FactSet.³ The outlays are starting to outrun cash generation, too. Alphabet’s own second-quarter 2026 earnings release showed the company’s first negative free cash flow quarter since its 2004 IPO, as $44.9 billion in quarterly capital expenditures outpaced $39.1 billion in operating cash flow.⁴ Several peers are increasingly turning to debt and equity issuance to fund the buildout rather than relying solely on cash on hand. That’s a lot of spending, but it paints a meaningfully different picture from the dot-com era, when capital was raised for companies with little to no revenue at all. These are profitable, cash-generating businesses that appear to be making a deliberate bet on future demand. Still, it’s a trend worth watching, since the market’s patience with this level of spending depends on cloud and AI revenue continuing to grow into it.

None of this means markets are risk-free or that a pullback couldn’t happen. Corrections are a normal, recurring part of investing, and we’re not in the business of predicting or timing them. What it does mean is that the “bubble” question doesn’t have one simple answer, which is exactly why we don’t build portfolios around any single company, sector, or theme, however compelling the story. Generally, spreading exposure across many companies, industries, asset classes, and geographies is what allows a portfolio to participate in growth trends like AI without being overly dependent on any one name or narrative.

Most likely, when people ask, “are we in a bubble?” what they really want to know is, “will my plan hold up if we experience volatility or a downturn in the market?” Remember, when (not if) markets correct, preparation and behavior is everything. We focus on what we can control and lean into process over prediction. Rather than trying to call the top of any trend, we stay diversified and let disciplined, systematic rebalancing help manage the risks inherent in equity investing.