The late 1990s dotcom bubble saw the tech-heavy Nasdaq index in the U.S. increase by 86% in 1999 alone, driven predominantly by companies announcing plans related to the internet. Alan Greenspan, the Federal Reserve chair at the time, described the stock market’s atmosphere as one of “irrational exuberance” as early as December 1996. Over the next three years, the market continued to rise, with Greenspan contributing to the momentum by cutting interest rates in response to a currency crisis in Asia and the collapse of the hedge fund Long-Term Capital Management.
Investors were often reluctant to refrain from participating, leading to significant market pressures and incidents such as Tony Dye, a fund manager who predicted a market downturn but lost his position just before his predictions came true. Analysts today draw parallels between the dotcom bubble and the current AI market, where notable similarities exist. Predictions regarding the development and adoption of AI lack certainty, raising questions about whether the market is approaching a peak similar to that of 1999 or if a downturn is imminent.
Recent analysis notes several indicators suggesting potential risks. First, market valuations appear high, with the cyclically adjusted price-to-earnings (CAPE) ratio reflecting levels similar to those of the dotcom peak. Secondly, a concentration of risk exists within the S&P 500, with a significant portion represented by seven major tech companies, all of which are tightly linked to the AI sector. These linkages raise concerns about market safety.
Moreover, the intertwining of AI firms through partnerships and financial arrangements may complicate the broader market landscape. Finally, the economic environment today differs significantly from the favorable conditions of the 1990s, with factors such as inflation and geopolitical tensions potentially hindering future growth.
While some argue that current conditions, particularly for leading companies like Nvidia, are more robust than those during the dotcom era, uncertainties remain. Overall, the question of whether the market is in a similar state to the late 1990s persists, leaving many uncertain about the future trajectory.
Source: https://www.theguardian.com/technology/nils-pratley-on-finance/2025/oct/08/the-ai-valuation-bubble-is-now-getting-silly