Is AI Enthusiasm Creating a Technology Bubble?

by Larry Adam of Raymond James, 11/18/25

Key takeaways

  • Tech comparisons to the dotcom era of the late 1990s are overstated
  • Today’s AI leaders are supported by solid fundamentals and real profits
  • AI demand continues to outpace supply, leading to significant capex spending

Skywatchers are thrilled this week as a rare geomagnetic storm has created another chance to witness the Aurora Borealis – better known as the Northern Lights. From Alaska to Florida, across nearly two dozen states, people caught glimpses of dazzling waves of green, purple, blue, red, and pink lighting up the night sky. Speaking of things shining bright, the S&P 500 is up ~16% year-to-date, powered by mega-cap gains riding the AI boom. Even with the modest declines this week, the index remains within striking distance of delivering its third straight year of 20%+ returns – a feat achieved only once before (five consecutive years from 1995–1999) in the past 75 years. These sustained tech-driven gains are drawing comparisons to the late 1990s and sparking debate over whether today’s AI enthusiasm is creating a bubble. Below, we break down the concerns and share our perspective:

Artificial intelligence bubble talk ‘lights up’

Tech’s rapid ascent in recent years has invited comparisons to the dot-com era—both fueled by transformative innovations. In the late 1990s, optimism around the internet drove major S&P 500 and NASDAQ gains; today, it’s artificial intelligence. While strong returns don’t necessarily signal a bubble, they do warrant closer attention. Here are a few factors worth monitoring:

  • High index concentration: Mega-cap valuations have made the S&P 500 increasingly top-heavy. The technology sector alone accounts for 36% of the index’s market cap, surpassing the dotcom era peak of 34%. Including tech-related names in other sectors – such as Meta, Amazon and the credit card companies – that figure rises above 50%. This concentration means the index’s performance is largely driven by a small group of growth-oriented, tech-related companies, which can narrow market breadth and reduce diversification. While this concentration aligns with our long-term positive view of tech, it’s worth noting that it could lead to risks that need to be managed.
  • Lofty valuations: Valuations on the S&P 500 appear stretched. While valuation metrics aren’t precise timing tools, the index is trading in its 99th percentile over the past 20 years – essentially at peak levels. The market is “priced for perfection” and vulnerable to pullbacks from any disappointments. However, higher valuations relative to history are supported by greater exposure to traditionally higher P/E sectors (such as the tech-related companies), stronger profitability metrics, consistent earnings beats and improved visibility into future results.
  • Circular financing risks: Recent partnership announcements across the tech ecosystem involve tens of billions of dollars in capital through interconnected relationships. These deals often fund purchases of products or services within the same network, creating a self-reinforcing loop. While collaboration can drive innovation, it’s important to ensure demand is sustainable and supported by underlying cash flows.