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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.
I understand the points being made, and I raised some of these in my comment here:
https://humbledollar.com/forum/that-dumb-stock-market/
While AI isn’t being built on sand (oh, wait! Silica is sand), Microsoft has been borrowing at the rate of $3 billion a month, although they argue they already have the data centers.
It does seem to be a race and the assumption is that the deepest pockets will prevail. This strategy is “spend the competition into oblivion” and lock in customers. We’ve been here before.
AI will succeed but it remains to be determined by whom, how it impacts the S&P 500 index, various companies, the US economy and my portfolio. There will be jobs lost and that seems to be a prime motivator. Some proponents say a 3 or 4-day work week is possible. However, no one says that workers will be paid 5-days of wages for working only 3 days.
One bright side is that they are building hard assets: Power generating plants, etc. so as to fuel their data center demands. Natural gas power plants are most favored because they are quick to build and can operate for extended periods. I suppose these could be connected to the US grid, but the interest is in off-grid power. If connected to the grid, any such plants could power homes and charge electric vehicles. But the AI companies haven’t expressed an interest in sharing. Water for cooling is another issue. In Pima County, Arizona there is a move afoot to build a “Project Blue” $3.6 Billion data center. No one is saying where the power or cooling water will come from. Summer temperatures may reach 105F or higher.
It remains to be seen if demand can justify the building of these data centers. At present our magnanimous mega tech corporations are distributing freebies. I suspect that the economics will dictate that this must change. Then will the public pay? Or prefer to use free Chinese AI? I look toward Tik-Tok as an example.
The current distribution strategies remind me of the methods once used by drug dealers when they entered the suburbs.
There are those who suggest we purchase individual stocks to cash in. The thinking is that some of these companies will build the foundational items. NVIDIA, ASML and TSMC come to mind and to date that strategy has done well. Others may include AMD and Palantir. No recommendations by me!
The growth curves may flatten, and then the money will move on.
One thing in AI’s favor is that the foundation, which is to say the Personal Computers are ubiquitous. It won’t take years to get HMIs that are useful because we already have them.
Companies can make rapid changes to their AI technology and do. These improved versions can then be accessed via the web. Which companies will be most successful? Will they be public companies? It would be interesting if private tech succeeds. Of course, Apple and Microsoft will do their best to force us to coerce the use of their products.
Some say LLMs are not the solution. This implies that there could be a dramatic shift, at any time. I am one of those who think AI is in the early stages. That is another reason that I think it is difficult to predict the winners 5-years out, or more distant.
Moore’s law predicted rapid performance improvements in computing technology. This may be happening in AI. That does not reveal how it will generate money. Executives are excited about the possibilities of eliminating workers.
This reminds me of the automation and robotics revolution. With CAD one engineer could replace a team. Robots replaced most of the workers in a factory. Automation routinely took installations of more than 400 workers to fewer than 100. Executives spoke about “reengineering the business” which was another smoke screen.
Today we have a serious struggle underway. We have companies eager to shed workers, workers who want “work – life” balance (i.e. less time spent working), and mega tech companies eager to capture and dominate market share. Some younger workers may get what they wish for, with far less work but less pay than is required to survive, or pay their debts.
I think there will be some dramatic changes ahead, but not in the form that the stock market optimists suggest.
Meanwhile, people will do what greedy people always do. They will chase the money and think they are geniuses. Hmmm, I wonder how those top-heavy index funds will do if the techs that have been powering the boom no longer do so?
There are those who suggest we should all “stay the course”. Back in 1970 my smart investing friends lamented “It doesn’t matter what I buy, it all goes down.” Before the Dot-Com bust some marveled “It doesn’t matter what I buy, it all goes up.” Today I look at the S&P 500 index performance and I think “Gee, that does look familiar”.
Some say “Just keep DCAing into the market index and it will all turn out.” Macro events are nothing to worry about. Right, macro events have never influenced the market before, or have they?
Not sure if everybody listens to the All-In Podcast (hosted by Jason Calacanis, a multi-millionaire venture capitalist). About 6 months ago, they discussed about the AI hype and some of them agreed that this AI hype was quite similar to the dot-com bubble. I’m not sure what episode number but you all should listen to the discussion if you can find that episode.
A very thoughtful post, Mark. It’s truly too technical for my beer truck driver brain, still, I remember reading that after the 2001 bust (or was it the 2008 disaster), that we shouldn’t plan on the future stellar growth we had become used to. Then we had some very profitable years. I’m hoping for history to repeat itself.
I appreciate Mark’s article which describes how the AI hype is different than the dot.com hype. I was an IT director who went through many hype cycles in my career, including the dot.com craziness. AI is real and impressive. I have used for personal analysis.
How you make money with it, given the huge investment, is not clear to me. But these are smart and proven companies, and I think they will figure it out.
Noah Smith who’s blog is Noahpinion had a very interesting take on the AI bubble and it’s consequences. You can read it here: America’s future could hinge on whether AI slightly disappoints
Thanks for the link; an interesting article. I guess the AI dice have been thrown; all we can do is wait and see how they land. Snake eyes or riches, time will tell.
I agree that the current AI frenzy is kind of like the dot com bubble but different in that this time the companies are real with real business plans and enormous current revenues and profits that fund billion dollar investments with the expectation of even greater future profit. And I agree that current AI equity pricing is above where it should realistically be and there will be a decline of some degree, at some point of time.
But I also believe that AI technology is already a productivity-adder and will greatly improve societies economic well being in the near and long term future. I especially believe AI applications beyond the large-language models that are now the public face of AI will provide the most significant advances in science and technology and productivity.
I disagree that an “AI bust” will result in a long-term period of flat markets. There seems to be a tendency to more rapid business cycles, and specifically of shorter down markets. I am not sure if this is due to technological change or more wiliness on the part of financial regulators to take action.
I am concerned that investing in the broad market indexes no longer provides the amount of diversification that it should. The top 10 holdings in both the S&P 500 index (37%) and the U.S. market index (33%) are identical and even the NASDAQ 100 index top 9 holdings (50%) are the same identical group of almost exclusively technology companies.
And yes, I do find myself holding more in technology and growth investments than any financial advisor would prudently recommend for a recent retiree. But between inflation, and not yet being at my “enough” threshold, there does not seem to be any alternative. In the past two years I have increased my fixed investments from about 10% when I was fully employed to about 22% now and believe that I can handle any reasonably probable market decline whether shallow or deep, brief or prolonged.
It’s surely a complex situation. Your thoughts are just as valid as my own, and I’d prefer your possible scenario.