UPDATED AI vs DOT COM BUBBLE
I last issued this analysis/comparison six months ago. This is a current update.
Recent patterns in the stock market are eerily similar to what happened in the late 1990’s during the dot-com bubble. This chart compares the price movements for the Nasdaq in the late 1990's (dot com bubble) to the current period. If we are in an AI bubble, I want to see how the current period compares to the last big tech bubble.
Up until July of 2026, the price trends were very similar. In recent months, the 2026 trend has continued higher compared to the 1998 period where the Nasdaq experienced a large correction (-30%).
The 1998 bear market was caused by a financial crisis in Russia followed by major losses at a large hedge fund called Long Term Capital Management. The Fed ended up bailing out LTCM and lowering rates to turn the situation around.
In 1998, the Nasdaq bounced back rapidly and growth accelerated rapidly over the subsequent four months. The Nasdaq increased by 77% from the beginning of October 1998 to the beginning of February 1999.
The 18 months between October of 1998 and March of 2000 represented the height of the dot-com craze where the Nasdaq grew by 250%. Beginning in March of 2000, the Nasdaq went on to lose 78% of it's value.
It took until 2015 for the Nasdaq to recover its losses.
The question of everyone’s minds right now is “What happens next in this market”?
KEY DIFFERENCES NOW vs. THEN
Based on the graph, the current cycle is running ahead of the dot-com cycle of the late 1990's.
I do not, however, expect the current AI cycle to match what happened in the late stages of the dot-com bubble.
The late 1990s period was a true bubble.
Prices rose solely based on the promise of the future of the internet.
Every dot-com stock was bid up to stratospheric heights.
The price gains were NOT driven by profit growth. Profit growth in the late 1990s was only average.
The current period is being supported by exceptional profit growth.
Corporate profit as measured by the S&P 500 grew at twice the normal rate in 2025 – mid-teens vs. the typical 8%.
2026 estimates for profit growth are expected to be more than 30% - three times the typical growth.
Profit growth is being driven by the tech companies – their profit growth is much higher than 27%.
This does not mean that I think we can escape a crash this time around.
Any crash this time won't be due to crazy valuations. The risk this time is that the massive AI investments fail to deliver returns to justify the spending.
Demand and revenues from AI are still growing, but will they grow fast enough?
AI pricing is based on the cost of tokens. A token is a way to measure AI computer usage. The trend in token prices is down. Some of that is due to efficiencies and some is due to Chinese competition. Efficiency is a good thing. Competitive pricing pressure is a bad thing for the US AI companies.
If we can believe the AI companies, they are saying that their most powerful and sophisticated models already exist and that they will be rolled out over the next two years. Since it takes time for companies and individuals to implement new technologies and to measure the impact, I don't think we'll know for two to three years if the AI reality matches the hype.
The market is currently in a cautious, wait-and-see mode regarding AI investments. I tend to use the semiconductor index fund (SMH) and a couple of other ETF's to track the AI segment of the stock market. Over the last six months, prices for those funds have been basically flat.
New breakthroughs and use cases for AI would drive stock prices higher while slower growth in AI demand would result in a correction. The good news is that at current stock price valuations, the future direction will be driven by actual results and not hype.
If the future data points on AI turn negative, the magnitude of any stock market decline will be driven by the financial contagion - the impact on the credit markets.
I will keep my investors situated aggressively in stocks if the trends support it. My Growth & Safety system is designed to win in up markets and to win in bear markets as well. If the worst case scenarios unfold, we move out of stocks and into income generating assets. We earn interest as we patiently wait for markets to recover.
We follow a data-driven, disciplined process that is not influenced by fear or greed. You should too.
In the last six months, the tech-heavy Nasdaq index has grown by a healthy 6.5% while my Growth & Safety fund has performed slightly better with an increase of 7.5%. My Growth & Safety system is unique in that it can capture stock market upside in good times and avoid major losses during market crashes.
If you would like to learn more about my unique investing system and how to invest in my Growth & Safety fund, click below to schedule a quick call.
Stay Disciplined My Friends,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
Comments