The ongoing growth of artificial intelligence (AI) is unlikely to repeat the ‘bubble and bust’ cycle of the dotcom era as underlying fundamentals are more sound and future growth is less speculative, a global investment firm has noted.
Principal Asset Management market strategist Magdalena Ocampo said the growth of AI and its related uses is on par with the technology boom seen in the dotcom era of 1995 to 2000, with billions invested in infrastructure, such as semiconductors, cloud platforms and data centres, to meet expected computing demand.
At the same time, the Magnificent 7 tech companies have dominated the S&P 500 and the last time a handful of stocks did this was during the dotcom era.
“While today’s AI rally exhibits traits seen in past bubbles, today’s fundamentals and macro backdrop are more supportive,” Ocampo said.
“Putting today’s valuations in perspective should temper fears of bubble-like conditions. At the peak of the dotcom bubble, tech stocks traded at 2.5 times premium to the S&P 500, with tech leaders – Cisco, Oracle, Microsoft and Intel – seeing their multiples surge from 30 times to over 80 times between 1997 and the peak.
“Today, the tech premium to the S&P 500 is closer to 1.3 times, with the earnings multiples of hyperscalers – Microsoft, Meta, Google and Amazon – remaining rangebound around 30 times.
“Importantly, their earnings growth is keeping pace with multiple expansion, suggesting rising prices are grounded in fundamental strength rather than speculation.”
She also noted further differences with the dotcom era in terms of cash flow and the ability of tech firms to manage a downturn.
“Today, tech fundamentals are stronger than they were during the dotcom era. Profit margins (around 28 per cent) and cash-flow margins (around 22 per cent) outpace those of the late 1990s (at around 7 per cent and 4 per cent respectively), underscoring tech companies’ resilience and their ability to generate cash more efficiently,” she said.
“Even if AI monetisation disappoints, these firms retain the flexibility to rein in spending and rebuild cash reserves – making a correction plausible, but a deep, dotcom-style bear market less likely.”
Given this outlook, she suggested investors can remain exposed to AI, but should continue to remain diversified across sectors, styles and market caps.
“Broadening exposure beyond technology and identifying segments poised to benefit from an improving macro outlook could be prudent. Cyclical sectors offer lower valuations and may benefit from tailwinds in 2026, driven by a more constructive economic backdrop and potential efficiency and earnings gains as companies integrate AI into their business models,” she added.
“While maintaining exposure to large-cap and growth, which are the forefront beneficiaries of the AI story, diversifying into other styles and sizes, such as value and small caps, could offer additional benefits. These pro-cyclical segments, which typically have lower valuations, generally perform well in a backdrop of improving economic prospects.”