Tech Bubble?

 

Is this the late 90’s, all over again?...

As of this writing, the Mag 7 composed of Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla, have ~$600 billion, in cash on their balance sheets...

The 1990s were truly an era for the ages. In my opinion, it represented the peak of music, sports, and perhaps most importantly, childhoods spent playing outside. Michael Jordan, Deion Sanders, Michael Jackson, Tupac Shakur, Kurt Cobain, and one of the greatest country singers of all time, Joe Diffie, all helped define the decade.

Beyond great athletes and artists, the 1990s also marked a transition from the world we once knew to the one we live in today, driven largely by the rapid expansion and adoption of the internet.

It would be an understatement to say the internet changed the world. Never had people possessed such an efficient way to communicate across the globe, after a twenty-minute dial up session of course. With this new technological excitement came stock market speculation. Everyone wanted to participate in what appeared to be the wealth generation machine that was the internet economy.

From 1998 to its peak in 2000, the tech heavy NASDAQ increased more than 220 percent. Everyone seemed to be making money in the stock market during the late 1990s, and this euphoria resulted in a near complete disregard for the underlying fundamentals of many newly issued stocks. Between 1998 and 2000, more than 1,000 companies went public, often with little or no profit and in many cases little or no revenue, but with compelling growth narratives that investors eagerly embraced.

However, in early 2000, the party ended. The peak of the dot com bubble occurred on March 10, 2000, when the NASDAQ Composite Index reached an all-time high at the time of 5,048.62. Over the next two and a half years, the tech heavy index would lose nearly 80 percent of its value, ultimately collapsing to a low of 1,114.11 on October 9, 2002.

Now, more than two decades later, the internet has indeed transformed society. Technology companies are among the wealthiest and most powerful businesses on the planet largely because of their ability to innovate and adapt within the digital economy. In many ways, the late 1990s tech bubble correctly anticipated the future.

So why did it collapse?

Simply put, investors were dramatically early, and prices became completely detached from economic reality.

Thousands of companies were going public during the late 1990s, and the market rewarded their shares handsomely even though, in the aggregate, many of these businesses were losing enormous amounts of money. To fund their losses, companies repeatedly issued new shares to eager investors. Rising stock prices allowed them to raise additional capital, which in turn financed further operating losses. If investors were willing to keep buying, the system appeared to work.

But like all speculative bubble manias, the process depended on ever increasing optimism and a continual flow of new capital. Once that confidence disappeared, the entire structure quickly unraveled.

Margin or leverage further exacerbated the issue with peak margin debt totaling roughly $300 billion, a very large number for that time. Money had been excessively borrowed, and spent, on worthless speculative assets, pushing those assets up to extreme and unjustifiable levels. Added, more shares were sold to the marketplace to compensate for previous losses and thus you have a classic momentum and euphoria driven bubble.

In step the Federal Reserve…..or rather the needle...

The excessive, and euphoric speculative chickens eventually came home to roost. Between 1999 and early 2000, the Fed raised the federal funds rate multiple times, moving it from 4.75 percent to 6.5 percent. Higher interest rates reduced liquidity and made speculative investments less attractive compared to safer assets. The system unwound and reality set in.

Today...

I believe the world today is very different than the late 90’s. Artificial Intelligence is the new internet, and the excitement has subsequently bid up stock price valuations to high levels in relative terms... but the devil is in the details.

• The current earnings yield (eps/price) of the NASDAQ Index is around 3%. That is more than two or even three times that of the estimated earnings yields in the late 90’s for the NSDQ. Tech companies are earning money.
• In 1999, the peak of the dot-com bubble, about 547 companies went public in the U.S., raising roughly $108 billion as investors rushed to fund new internet businesses. In 2025, the market was far more subdued, with about 200 IPOs raising around $44 billion, reflecting a slower and more selective public market environment. An excessive number of shares are not diluting supply.
• The largest source of AI funding today is capital spending by Microsoft, Alphabet, Amazon, and Meta Platforms, which are investing hundreds of billions of dollars into data centers and computing infrastructure. Unlike the late 1990s, much of this investment is financed internally by highly profitable firms rather than by public market speculation. Investments are being made by the richest companies on the planet, who in turn can absorb the expected costs i.e. losses.
• Future growth rates could justify current valuations, whereas in the late 1990s future earnings were significantly overstated. When growth expectations are taken into consideration, current PE ratios become much more rational.
• Ai productivity has yet to work its way through the system as we are only in the early stages of implementation. I believe this will benefit the bottom lines of the broader market for years to come.
• The combined balance of the MAG 7’s cash balances equals almost $600 Billion. This provides capital structure stability and is unlike balance sheets associated with 90’s era tech companies.