Are US Equities Set to Repeat the Dot-Com Bust of the Early 2000s?

No, we don’t think so. There are parallels between today’s AI-related developments and the internet revolution of the late 1990s and early 2000s, as both eras involve profound technological change. Market concentration, increased capital investments, and valuation risks are among those parallels. However, the quality of companies today is higher and speculative excesses are less extreme. That said, risks are elevated in mega-cap tech stocks, even if they are less pronounced than in the dot-com days. As a result, we recommend modest tilts to developed markets small-cap and value equities to help balance portfolios.

One of the challenges with a transformative technology is forecasting its impact on growth. This often leads to excessive exuberance, with investors flocking to tech leaders’ stocks. The market capitalization of these stocks then increases at a faster pace than the broader market, leading to increased market concentration. This dynamic is evident today, just as it was in the late 1990s. Over the last two years, an average of 65% of the total US market return can be attributed to the top ten companies by weight in the index, compared to 60% in 1999.

Investors are not the only ones who catch the optimism bug. During the dot-com era, tech management teams grossly overestimated growth in internet traffic, which led to an overbuild of fiber-optic networks. The fallout from excessive spending in the late 1990s wasn’t truly appreciated until the early 2000s. The risk of repeating this error in today’s cycle is likely top of mind for analysts. Recent guidance from six of the Magnificent 7 ¹ companies points to a significant increase in capital expenditures to support AI-related growth. Analysts project these companies will grow investments by 25% in 2025, outpacing revenue growth by 1.3x on a market cap–weighted basis.

Alongside this euphoria, valuations also tend to rise. And as we know, high starting valuations tend to not bode well for forward ten-year returns. The average normalized price-to–cash earnings multiple at the end of 1999 (24.7x) was slightly higher than that at the end of 2024 (23.2x). This similarity in valuation levels, combined with the other parallels discussed earlier, may understandably raise concerns among investors. However, there are some important distinctions today that make it reasonable to assume that we are not headed for a repeat of the dot-com era bust.

For instance, the quality of US companies is higher today than in the late 1990s. This is evident in higher profitability—IT sector operating margins averaged just 13.6% in 1998 and 1999, far lower than the 23.7% on average over the last two years. US equities balance sheets are also stronger now. The ability for companies to cover interest expenses by cash flow from operations averaged 9.6x in 2023 and 2024, compared to just 5.3x in the late 1990s. Growth is more robust as well in the US market now. The five-year trailing annualized average compounded growth is forecast to be 16% for the period ending in 2025 compared to the 11% realized in 1999.

Speculative excesses are also less pronounced today. For example, while valuations are expensive today, investor frenzy was far worse during the dot-com bubble. In 1999, the price-to–forward earnings multiple for the average US company expanded by 27% over the prior three-year period, compared to a 2% reduction in 2024. Similarly, IPO markets were on fire in the late 1990s, with more than 370 tech IPOs in 1999, compared to just 14 in 2024. ² Many IPOs listed in the late 1990s went bust, none more emblematic of the underlying business model’s failure than Pets.com, which filed for bankruptcy just nine months after listing.

However, we recognize that AI-related frenzy does exist in the market today, as reflected in market concentration and valuation levels. Heightened US government policy-related risks are also present. So, while we do not expect a repeat of the dot-com bust, we do caution investors that mega-cap, tech-related stock prices may not be adequately reflecting market risks and modest tilts to developed markets small-cap and value equities may help balance portfolios.

Sehr Dsani, Senior Investment Director, Capital Markets Research

Footnotes

1. Sell-side analyst forecasts include expectations for Alphabet, Amazon, Apple, Meta, Microsoft, and Nvidia. Tesla was excluded.
2. Jay R. Ritter, “Initial Public Offerings: Updated Statistics,” University of Florida, February 20, 2025.