Is today's AI boom bigger than the dotcom bubble?

Globe and Mail

22-07-2025

Wall Street's concentration in the red-hot tech sector is, by some measures, greater than it has ever been, eclipsing levels hit during the 1990s dotcom bubble. But does this mean history is bound to repeat itself?
The growing concentration in U.S. equities instantly brings to mind the internet and communications frenzy of the late 1990s. The tech-heavy Nasdaq peaked in March 2000 before cratering 65 per cent over the following 12 months. And it didn't revisit its previous high for 14 years.
It seems unlikely that we'll see a repeat of this today, right? Maybe.
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The market's reaction function appears to be different from what it was during the dotcom boom and bust. Just look at the current rebound from its post-'Liberation Day' tariff slump in early April – one of the fastest on record – or its rally during the pandemic.
But despite all of these differences, there are also some worrying parallels. Investors would do well to keep both in mind.
The most obvious similarity between these two periods is the concentration of tech and related industries in U.S. equity markets. The broad tech sector now accounts for 34 per cent of the S&P 500's market cap, according to some data, exceeding the previous record of 33 per cent set in March 2000.
Of the top 10 companies by market capitalization today, eight are tech or communications behemoths. They include the so-called 'Magnificent 7′ – Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla – as well as Berkshire Hathaway and JPMorgan.
By contrast, only five of the 10 biggest companies in 1999 were tech firms. The other five were General Electric, Citi, Exxon, Walmart, and Home Depot.
On top of that, the top 10 companies' footprint in the S&P 500 today is much larger than it was back then. The combined market cap of the top 10 today is almost US$22-trillion, or 40 per cent of the index's total, significantly higher than the comparable 25 per cent in 1999.
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This all reflects the fact that technology plays a much bigger role in the U.S. economy today than it did around the turn of the millennium.
By some measures, the current tech boom, driven in part by enthusiasm for artificial intelligence, is more extreme than the IT bubble of the late 1990s.
As Torsten Slok, chief economist at Apollo Global Management, points out, the 12-month forward earnings valuation of today's top 10 stocks in the S&P 500 is higher than it was 25 years ago.
However, it's worth remembering that the dotcom bubble was characterized by a frenzy of public offerings and a raft of companies with shares valued at triple-digit multiples of future earnings. That's not the case today.
While the S&P tech sector is trading at 29.5 times forward earnings today, which is high by historical standards, this is nowhere near the peak of almost 50 times recorded in 2000. Similarly, the S&P 500 and Nasdaq are currently trading around 22 and 28.5 times forward earnings, compared with the dotcom peaks of 24.5 and over 70 times, respectively.
With all that being said, a meaningful, prolonged market correction cannot be ruled out, especially if AI-driven growth isn't delivered as quickly as investors expect.
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AI, the new driver of technological development, will require vast capital outlays, especially on data centres, which may mean that earnings and share price growth in tech could slow in the short run.
According to Morgan Stanley, the transformative potential of generative AI will require roughly US$2.9-trillion of global data centre spending through 2028, comprising US$1.6-trillion on hardware like chips and servers and US$1.3-trillion on infrastructure.
That means investment needs of over US$900-billion in 2028, they reckon. For context, combined capital expenditure by all S&P 500 companies last year was around US$950-billion.
Wall Street analysts are well aware of these figures, which suggests that at least some percentage of these huge sums should be factored into current share prices and expected earnings, but what if the benefits of AI take longer to deliver? Or what if an upstart (remember China's DeepSeek) dramatically shifts growth expectations for a major component of the index, like US$4-trillion chipmaker Nvidia?
Of course, technology is so fundamental to today's society and economy that it's difficult to imagine its market footprint shrinking too much, for too long, as this raises the inevitable question of where investor capital would go. It's therefore reasonable to question whether a tech crash today would take well over a decade to recover from.
But, on the other hand, it's that type of thinking that has gotten investors into trouble before.