Is the AI Boom a Bubble Waiting to Burst? Lessons from the Dot-Com Era
Every generation has its “can’t miss” investment trend and today, that title belongs to artificial intelligence. Billions of dollars are being poured into AI companies, from startups promising to revolutionize entire industries to established giants racing to dominate the next wave of digital transformation. But as excitement builds, so do the warnings. Even industry leaders like Sam Altman and Mark Zuckerberg have voiced concerns that AI spending is starting to look a lot like a bubble.
History tells us that every boom carries the seeds of its own bust. The dot-com bubble of the late 1990s offers a cautionary tale. Venture capital funding skyrocketed from just $3 billion in 1995 to $105 billion in 2000, a 35-fold increase. Today, AI investment is showing a similar pattern, though not quite as explosive: corporate investment has jumped from $103 billion in 2019 to $252 billion in 2024, more than doubling in just five years.
Valuations are climbing, too. During the dot-com era, the NASDAQ’s price-to-earnings ratio averaged around 70 times earnings unsustainable by any measure. Today, the ratio sits closer to 35 times earnings, still high but not yet at bubble territory. However, the concentration of market power is eerily similar: the “Magnificent Seven” tech companies now make up 34% of the S&P 500’s total value, nearly matching the entire tech sector’s dominance at the height of the 2000 bubble.
So, what triggers these bubbles to burst? Historically, it comes down to a mix of greed, overvaluation, and rising interest rates. When the cost of borrowing increases, capital becomes scarce, and inflated valuations quickly deflate. The dot-com crash saw the NASDAQ plunge 78% from its peak, wiping out trillions in paper wealth and leaving a trail of bankrupt startups.
The good news is that today’s economic environment looks different. Interest rates are falling, not rising, as the Federal Reserve signals potential rate cuts through 2025 and 2026. Easier borrowing conditions could help prolong the current cycle and sustain investment in AI at least for now. Still, history shows that no market expands forever. Over the past century, there have been 16 recessions and roughly 25 market crashes, proving that downturns are an inevitable part of the economic rhythm.
But not all downturns are disasters. In fact, some of the best investment opportunities emerge during market corrections. As one analyst humorously describes, markets go through the cycle of “POOP” Panic leads to Overselling, which creates Opportunity, leading back to Profit. Investors who kept calm during the dot-com collapse and the 2008 financial crisis found themselves buying blue-chip companies at bargain prices and reaping massive gains in the recovery.
That’s the real takeaway for investors today. Whether or not AI is in a bubble, the key is preparedness. Have a plan. Keep cash reserves ready. Understand what you own and why. If the AI market cools, those who panic will sell at a loss but those who planned ahead will have the liquidity and confidence to buy into the next wave of innovation at a discount.
The AI boom might not be a repeat of 2000 but it’s certainly rhyming. Just as the internet reshaped the economy, artificial intelligence is transforming it again. The difference between those who get burned and those who build wealth will come down to patience, perspective, and preparation.
Jaspreet Singh is not a licensed financial advisor. He is a licensed attorney, but he is not providing you with legal advice in this article. This article, the topics discussed, and ideas presented are Jaspreet’s opinions and presented for entertainment purposes only. The information presented should not be construed as financial or legal advice. Always do your own due diligence.
