The late 90’s will be remembered for many things: low rise jeans, Y2K fears, and the inexplicable resurgence of swing music. For stock market investors, the era recalls the meteoric rise and subsequent popping of the dot-com bubble.
With artificial intelligence dominating financial headlines, the stock market reaching new highs, and kids raiding thrift stores for 90’s fashion, investors may be wondering if history is repeating itself. It’s a fair question, especially given the high valuations and the enormous sums being invested in AI infrastructure.
AI spending by large companies is on the order of $10 – $15 billion per project over multi-year periods, with aggregate spending across the industry potentially reaching hundreds of billions of dollars. This includes building new data centers, enhancing computer infrastructure, and hiring AI researchers. The question is whether the technology will ultimately generate enough value to justify the spending.
Distinguishing between healthy growth and a bubble is difficult while it’s happening. In hindsight, the dot-com bubble is obvious—companies with no revenue were valued in the billions. But not everything that drives markets higher turns out to be a bubble. One key difference between now and the late ‘90s is that many of today’s AI leaders are profitable, established companies with strong balance sheets and growing cash flows. The high price-to-earnings (P/E) ratios of the dot-coms were largely a result of low earnings, whereas today’s AI leaders, including the so-called “Magnificent 7” companies, are delivering strong top- and bottom-line growth.
Even when we agree something was a bubble in hindsight, the underlying technology may still be transformative. The dot-com bubble is a helpful example: investors at the time overestimated how quickly it would generate profits. Yet, the internet did transform the economy and our daily lives, to the point that we can’t imagine living without it.
What AI can do today is already remarkable. For many investors and business leaders, the hope is that AI will drive significant productivity improvements. This is the essence of innovation and economic growth. However, productivity gains from new technologies don’t happen overnight. It takes time for new technologies to gain widespread adoption, particularly among businesses that must reorganize their operations to benefit.
With the S&P 500 trading at a forward P/E ratio of over 22x, markets are pricing in significant future growth. The question is whether current valuations properly reflect the timeline and magnitude of returns. The honest answer is, we won’t know until we’re further down the road.
If that’s the case, it’s less useful to wonder, “are we in an AI bubble?” and more worthwhile to ponder if your portfolio is positioned to weather various market and economic cycles.
Our approach to positioning for bubbles, downturns, and everything in between:
AI represents a genuine technological revolution that will likely transform the economy over time. However, the path from here to there may be more volatile and take longer than current market enthusiasm suggests. Rather than trying to predict whether this is a bubble, we encourage you to focus on maintaining a long-term view to benefit from innovation while managing risks.
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