AI Boom Echoes Dot-Com Bubble: Investor Warns of Risks
This week marks 25 years since the dot-com bubble peaked, a period of tech-fueled euphoria that ended in a massive market crash. The Nasdaq-100 took over 15 years to recover its dot-com highs. Now, an investor who predicted that crash is raising concerns about today’s AI market.
Familiar Warning Signs
In hindsight, the signs of the dot-com crash were apparent. Former Federal Reserve Chairman Alan Greenspan’s 1996 warning about “irrational exuberance” went unheeded as investors focused on technological potential over financial fundamentals.
The S&P 500 hit its peak on March 24, 2000, at 1,527.46. The Nasdaq-100 followed on March 27 at 4,704.73. The Nasdaq Composite had already reached its high on March 10, while the Dow Jones Industrial Average peaked earlier in January.
The Aftermath
When the bubble burst, the ensuing bear market wiped out trillions in market value. The Nasdaq-100 plummeted over 80%, while the terrorist attacks of September 11, 2001, and corporate scandals like Enron further eroded confidence.
Euphoria and Reckoning
During the dot-com era, stock speculation was widespread. Sam Stovall, Chief Investment Strategist at CFRA, recalls the sentiment:
“Everyone believed it was a new era where valuations didn’t matter. The only concern was how much money you had in the market.”
The Federal Reserve’s interest rate hikes in 1999 and a subsequent mild recession in 2001 exacerbated the downturn. Companies that relied on hype over profitability faced steep losses as revenue projections fell short.
A Long Road to Recovery
While the S&P 500 regained its highs by May 2007, the Nasdaq-100 and Nasdaq Composite required over 15 years to recover.
Startups like Webvan, Pets.com, and Boo.com became infamous for their failures. Even established companies like Cisco Systems, which briefly became the world’s most valuable company, have yet to reach their dot-com-era valuations. Telecom companies like WorldCom collapsed under the weight of fraud and poor business models.
Parallels in the AI Craze
James Stack, president of InvesTech Research, predicted the dot-com crash. Now, he warns of similarities with the AI market. Since the launch of ChatGPT in 2022, the Nasdaq-100’s gains have mirrored its meteoric rise during the dot-com boom.
“We don’t have extreme small-cap valuations like before, but major companies like Cisco lost 60% to 70% in the crash,” Stack explained.
Despite some moderation in valuations, Stack remains cautious, holding nearly 50% of his clients’ portfolios in cash.
“The most concerning similarity is the overconfidence in the market’s resilience. That’s when investors are most vulnerable,” he warned.
While AI may deliver long-term value, Stack’s insights serve as a reminder that market bubbles often burst when confidence is at its highest.
