Same But Different: The AI Bubble That Isn’t (Quite)
Have you been getting that familiar tingling sensation lately? The one that says "you've seen this all before." Watching AI stocks soar, then keep on going, I can't help but think back to the year 2000. I genuinely knew a guy back then who quit his job to day-trade dot-com stocks from his house. He now works in insurance. There's a lesson in there somewhere I guess.
Comparisons to the dot-com bust are rife. I may be a slightly thick Irish guy, but even I get the vibe. The parallels are hard to ignore. We've got speculative fever, we've got massive market concentration, and we've got that same cocktail of hype and FOMO that makes normally sane people do irrational things. But I think, if you look a bit deeper, it's different. I know, famous last words and all that.
The dot-com era was built on PowerPoint dreams and very little business fundamentals. I remember hearing on the news about companies with no revenue, no profits, and business plans that essentially read: "Step 1: Get eyeballs. Step 2: ??? Step 3: Profit!" doing IPOs, and investors were throwing money at them all because of a ".com" suffix. Truly unbelievable! When the music stopped, thousands of these businesses simply evaporated. Poof, gone. Along with your great uncle Jack's life savings.
If I look at the companies driving this current AI surge, we're talking about Amazon, Alphabet, Microsoft, Apple—the established giants with cash flows that would make small nations jealous. Profits wise? Most other corporations want to go huff in the corner at how unfair it all is.
They aren't startups operating out of converted warehouses. These aren't businesses held together by venture capital and wishful thinking; they've got proven revenue streams from cloud computing and digital advertising. Their valuations might be stretched, but they're supported by actual, growing earnings. The AI buildout? They're funding it from their own massive balance sheets, not by desperately issuing equity and begging for another funding round. That's definitely different.
What to do? That's the question. Both eras share an obsession with a singular, supposedly world-changing technology. Back then it was the commercial Internet; now it's AI. Traditional valuation metrics are really distorted. Market concentration is high. A handful of tech giants account for an outsized chunk of my Vanguard portfolio performance. If something goes sideways with these few companies, the ripple effect could be brutal, just like it was when the big boys of 2000 came tumbling down.
So, where does that leave my thoughts? Sitting in my sunroom, laptop open, looking at charts that show AI and tech stocks climbing higher, I think—or maybe it's just hope—that we're in a different position. It's a bubble, I'm certain of that, but one built on actual profits rather than futuristic fever dreams. The solid financial foundation of today's market leaders offers protection that was just a dream twenty-five years ago. Then, it was a pot of gold at the end of a leprechaun's rainbow.
Do I personally think a tech bust is coming? Definitely. This tech boom can't live up to the hype. It's going down baby, and it's going to end badly. The difference I think is the scale. I don't foresee the near existential collapse of 2000 overwhelming us—just a common or garden wipeout. Small mercies, don't you think?
I think the real point of worry is after the bust. To me, the vast amounts spent on tech buildout will take years to show up in profits, possibly leading to at least 4 or 5 years of flat markets until valuations catch up with the past capital spend. We could be leaning into our fixed income for quite a while. That's the area I'd be concentrating on building up while bond yields are decent. Maybe you should give it some thought also. But whatever you do, I think it's going to be interesting!
Alas, as you might know, I'm Irish. And if nothing else, we're very good at the gift of the gab and talking pipe dreams and fairy tales. Maybe that's all my thoughts are, but the alarming thing to my mind is this: I don't think anyone's thinking is any better in these unusual times.
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