Get all your news in one place.
100’s of premium titles.
One app.
Start reading
Investors Business Daily
Investors Business Daily
Business
JUAN CARLOS ARANCIBIA

Are AI Stocks Driving A Stock Market Tech Bubble? Here's What The Data Says.

Oracle shares soar on a bullish earnings report. Stock market valuations become sharply elevated. Stock fever draws in novice investors eager to profit from a transformative new technology.

That sounds a lot like today's AI stock-driven market. But those events unfolded in the summer of 1999, shortly before Wall Street ended one of its best and longest bull markets with an ignominious sell-off from which it took years to recover.

Is the stock market in another tech bubble? Is the artificial intelligence trade echoing the dot-com stock market crash? Those questions gnaw at many investors who wonder now how long the good times will last. The S&P 500 is up 13% in 2025 despite the global economic uncertainty of a tariff trade war — and after rising more than 20% each of the previous two years. With bubble talk in the background, investors should watch if AI stocks start to break down. But index performance suggests there's no bubble yet.

Bubble fears received some validation in August, when OpenAI CEO Sam Altman warned that investors are "overexcited" about AI in an interview with The Verge and other reporters.

Altman compared investor enthusiasm over AI to the dot-com bubble in the 1990s. Some AI startups with little more than an idea are receiving billions of dollars in funding. "That's not rational behavior," Altman said. "Someone's gonna get burned there, I think."

For investors asking whether the stock market is reaching bubble elevations, four factors help answer the question: stock valuations, market behavior, tech fundamentals and concentration of stock market leadership. Here's what the facts say about the stock market outlook as the bull market continues.

Is AI Stock Market Currently Overvalued?

Stock valuations have grown uncomfortably high for institutional investors. Risk appetite fell to the lowest level since April in this month's S&P Global Investment Manager Index, which is based on a survey of 300 fund managers. This caution comes even as institutions expect an economic tailwind from interest-rate cuts.

"The biggest drag on the market is coming from concerns over valuations, worries which are now at an unprecedented level for the survey," the report noted. Nearly 60% of survey respondents expected lower stock market returns in September.

Indeed, some valuation measures show the stock market is dangerously expensive. As of August, the price-earnings ratio of the S&P 500 was at 22.7, according to Wells Fargo. That's the highest since the dot-com stock market bubble, when the ratio hit 25 on a forward 12-months basis.

The IBD Methodology: How To Invest In Stocks While Managing Risks

The cyclically adjusted price-to-earnings (CAPE) ratio is almost at the highest level since 2021, right before the major indexes went into a bear market. The ratio, invented by Yale economist Robert Shiller, divides the current market price by the average inflation-adjusted S&P 500 earnings over the past 10 years. That's long enough to cover multiple business cycles.

There was another peak in this valuation tool in 2007, ahead of the mortgage crisis, around 27. The CAPE remains far from its all-time peak in 1999, when it foreshadowed the dot-com bubble burst. But it's still at the third-highest point in its history. And near 40, today's CAPE ratio is well above the historical average around 17.

Other Ways To Measure If Stocks Are Overvalued

A better way to look at it could be starting with the dawn of the Internet Age in 1995, factoring in the efficiencies that the economy has reaped from digitalization, says Jim Masturzo, chief investment officer of Multi-Asset Strategies at investment advisor Research Affiliates. The average over the past 30 years is about 28. Current levels are still well above it.

A global comparison also shows U.S. stocks are more expensive compared with stock markets in other industrialized economies.

In Masturzo's mind, there's no doubt the stock market is in a new bubble. Valuation multiples for large tech companies, and the assumptions built into those values, are unrealistic. "We see that from the potential of what has to happen to revenue growth and other sorts of fundamentals" to justify the valuations, he said.

How To Read Stock Charts

So, when will the stock market revert to the historical mean? "That's one (answer) we don't know," he added. Research Affiliates is advising retail investors to avoid timing the market and to diversify their portfolios, seeking opportunities in markets that aren't overvalued.

Stock Market Behavior: Normal Or Signaling A Bubble?

Nancy Tengler, CEO and chief investment officer at Laffer Tengler Investments, has been comparing today's market to the dot-com bubble. But she's not losing sleep. Valuation gauges, she says, aren't very useful at transformational times in the economy.

The average bull market lasts 59 months with a return of 178%. The current bull market is 34 months old with an 81% return. That suggests it's got a long way to go, especially in the context of the 1990s bull market. Back then, the market saw an expansion of about 120 months and gains of around 420%.

"It's not just AI. It's robotics, it's space, it's quantum computing — things that we haven't factored in yet that I think will change the way that we live for decades," Tengler said. "So, am I worried about a bubble? I mean, I think we always worry about that, but I don't think this is yet a bubble."

Some analysts notice an eerie resemblance in the current Nasdaq composite to the 1990s.

The stock market has marked roughly 700 trading sessions since the Nasdaq's bear-market low in December 2022, just after the launch of ChatGPT in November 2022. The Nasdaq's performance is nearly identical to the same 700-day period starting in 1995, DataTrek Research cofounder Jessica Rabe said in a Sept. 17 report. Both gains were about 120%.

Why AI Stocks May Have Room To Run

Bulls can take some comfort knowing the Nasdaq didn't peak until several years later, in March 2000, about tripling in price from the 700-day mark. That period saw several stock corrections, including the ones triggered by the Asian financial crisis and interest-rate uncertainty.

Moreover, many of the leading dot-com stocks made bearish climax tops or failed from late-stage bases in 2000. So far today, the principal AI stocks aren't showing similar signs of exhaustion.

Check The Latest Stock Market Action

A rough comparison to the second half of the 1990s also shows no overheating so far. In the nearly 700-day period ending Sept. 17, the Nasdaq was underperforming vs. the comparable period in the second half of the 1990s, 75% vs. 103%. "We find this disparity reassuring as it shows animal spirits aren't currently running nearly as hot as in the back half of the '90s, which eventually led to a bubble in early 2000," Rabe wrote.

"Not only do we think U.S. large-cap tech stocks are still currently early in a secular bull run driven by monetization opportunities around gen AI, but they have much better fundamentals now than back then. There will be pullbacks just like in every bull market, and we view those as buying opportunities."

AI Stocks And Fundamentals

Tengler agrees the current tech boom rests on firmer fundamentals. In their earnings calls, companies show a lot of productivity improvements. They're hiring less, managing supply chains better, and improving product development and marketing. That's showing up in margins, which remain close to historic highs despite tariffs, she said.

In comparison, many dot-coms of the 1990s had fragile business models that shattered once the bubble burst. "Microsoft in 2025 is not Microsoft in 1999. It's got a fortress balance sheet," Tengler said.

See The Latest Updates To IBD Watchlists

Current AI stock leaders are largely mega-companies that are highly profitable and fund capital expenditures mainly with free cash flow, Douglas Beath, global investment strategist at Wells Fargo Investment Institute, said in a report. By comparison, unprofitable businesses and startups funded mainly by debt and venture capital characterized the dot-coms.

When it comes to disruptive technologies, earnings expectations may not develop as quickly or completely as needed to support higher future stock prices, Beath added. "For this purpose, we see both positive and potentially negative factors impacting the AI sector going forward."

While the market's ultimate peak is impossible to predict, investors have tools to determine if that moment — or a temporary correction — is at hand. Watch for the major indexes to break important price levels, such as the 50-day moving average. Check The Big Picture for the current market analysis.

It may be even more important to watch the behavior of AI leaders such as Nvidia, Taiwan Semiconductor or Meta Platforms. If those flash sell signals, the selling could easily spread to the rest of the market. Watch out for breaks below key moving averages or support levels. Consider selling at least some stocks to reduce exposure. Investors worried about giving back gains could take profits once their trades are up 20% or 25%, following an IBD portfolio management guideline.

What About AI Stocks In The IPO Market?

The IPO market also can provide perspective on stock market froth. Explosive early rallies for recent IPOs such as Figma and Circle Internet Group brought back memories of the internet bubble. Figma, the collaborative digital design platform, traded as much as 333% over its IPO price in just two days after it came public in July. Stablecoin platform Circle surged more than 800% from its IPO price in less than a month after its June offering. Both stocks are off sharply since then, though they remain well above their IPO price.

Still, the current IPO market so far lacks the hype of the 1990s, says Avery Marquez, director of investment strategies at IPO tracking firm Renaissance Capital.

More companies are mentioning AI in their IPO prospectuses. While that's similar to how startups would throw around the term "internet" to cash in on the hype of the late 1990s, there is a difference today. Companies are using AI to make themselves more productive, she said. That's far from the days when just having a website was considered a business model.

Market Breadth And AI Stocks

One sign of a bubble is when crowds become exceedingly bullish, and novices get into the market for fear of missing out. The current value of U.S. households' holdings of equities is $55.6 trillion, or 29% of total assets ($190.1 trillion total). That's a record high.

No doubt, the appreciation of the stock market is the main reason. But William Blair analyst Richard de Chazal suspects that many people put off by high mortgage rates and elevated housing prices have shifted funds into the rapidly rising stock market.

Another sign of a market bubble occurs when market leadership narrows too much. That is, a few stocks drive the bulk of the gains in market indexes like the S&P 500 and Nasdaq composite, while most stocks post more muted returns.

Even though the Nasdaq soared 85.6% in 1999, more than half its components fell that year. In other words, market breadth was poor. It's not so bad today: 58% of the stocks in IBD's database of 11,200 stocks are higher so far in 2025.

Some signs suggest narrow leadership, however. The technology and communications services sectors are up roughly 20% this year, leading the S&P 500 by wide margins over most other sectors. The next-best sector is industrials, up about 15%.

S&P 500 Sector Performance (Year to date through 9.24)
Communications Services 25.5
Information Technology 19.8
Industrials 15.6
Utilities 13.9
Financials 10.9
Materials 6.9
Energy 5.5
Consumer Discretionary 4.8
Consumer Staples 2.4
Real Estate 2.2
Health Care -0.8
Overall index 12.8

Just like in the internet bubble, a handful of companies are carrying the bulk of the S&P 500's price performance.

Pete Mulmat, CEO of IG North America, the parent company of brokerage Tastytrade, says the imbalance is worse today than in the internet bubble. In an Aug. 13 note, he noted that the 10 largest stocks by market capitalization account for nearly 40% of the overall value of the S&P 500. In the 2000 bubble, the top 10 stocks accounted for 23% of the overall market cap.

"There are a lot of comparisons circulating between this market being AI-driven and that market being internet-driven, so draw your own conclusions," Mulmat cautioned. "But concentration risk is certainly something that's building."

Sign up to read this article
Read news from 100’s of titles, curated specifically for you.
Already a member? Sign in here
Related Stories
Top stories on inkl right now
One subscription that gives you access to news from hundreds of sites
Already a member? Sign in here
Our Picks
Fourteen days free
Download the app
One app. One membership.
100+ trusted global sources.