Dot-com Era Reckoning Raises Specter of Stumbling Stock Market

A groundbreaking technology emerges, captivating investors with its vast potential. Enthusiasm drives stock prices higher, fueling a market rally. Eventually, valuations spiral out of control, and the inevitable crash follows.

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This cycle of exuberance and collapse is reminiscent of the dot-com bubble, which burst 25 years ago. On March 24, 2000, the S&P 500 hit a record high it wouldn’t surpass until 2007. Just days later, the Nasdaq 100 reached its peak, a level it wouldn’t revisit for over 15 years. That peak marked the end of a surge that began in 1995 with Netscape Communications Corp.’s high-profile IPO.

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Between then and March 2000, the S&P 500 nearly tripled, while the Nasdaq 100 skyrocketed by 718%. Then the crash came—by October 2002, the Nasdaq had lost over 80% of its value, and the S&P 500 had been slashed in half.

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Now, history appears to be echoing. The latest transformative force is artificial intelligence. The S&P 500 soared 72% from its low in October 2022 to its recent peak, adding over $22 trillion in market value. But cracks are appearing. The Nasdaq 100 has fallen more than 10%, entering a correction, and the S&P 500 briefly dipped to that level as well. The parallels to the dot-com era are unnerving.

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Billionaire venture capitalist Vinod Khosla, a key player in the internet boom, describes investor sentiment shifting from fear to greed. “When you get greed, you get indiscriminate valuations,” he explains.

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Key Differences Between the Dot-Com and AI Booms

While AI’s rapid rise has been extraordinary, it doesn’t quite match the extremes of the dot-com frenzy.

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“The internet was such a massive idea, so transformative, that companies feared being left behind,” says Steve Case, former CEO of AOL. “That led to huge investments—some paid off, many didn’t.”

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Case is familiar with high-risk bets. In January 2000, as AOL’s stock soared, he engineered a historic merger with Time Warner. The deal quickly soured. What looked promising on paper proved disastrous in practice, and by 2009, the companies had separated.

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This type of overreach is what concerns Wall Street today.

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MIT economist and Nobel laureate Daron Acemoglu explains that during the dot-com era, hype preceded viable business models. “That’s why we had an internet boom and then a bust,” he says.

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The nature of the companies at the center of the AI rally also sets this moment apart. Unlike the dot-com era, when unprofitable startups flooded the market, today’s AI boom is concentrated among some of the world’s most financially secure companies—Alphabet, Amazon, Apple, Meta, Microsoft, and Nvidia.

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These tech giants generate enormous amounts of cash. Analysts expect Alphabet, Amazon, Meta, and Microsoft to invest $300 billion in AI development this year alone. Even with that spending, they are projected to generate a combined $234 billion in free cash flow.

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The Role of Profitability in Market Bubbles

The dot-com boom lacked this financial stability. Instead, it was driven by speculative startups burning through cash.

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“A huge number of companies in the top 200 market cap had a negative burn rate,” says billionaire investor Ken Fisher. “What makes a bubble a bubble is that negative burn rate.”

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This fundamental difference makes direct comparisons between today’s AI-driven market and the dot-com era challenging. In 1999, the Nasdaq’s price-to-earnings (P/E) ratio reached about 90 times earnings, compared to roughly 35 today.

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But traditional valuation metrics barely mattered during the dot-com bubble. Many companies were unprofitable, so Wall Street invented alternative ways to measure success, such as website traffic and user engagement—metrics unrelated to financial performance.

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Despite the absurdity of these valuation methods, investors eagerly poured money into internet stocks as prices soared. “Brokers were making as much from their personal investments as from their salaries,” recalls Anthony Saglimbene, chief market strategist at Ameriprise Financial.

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By March 2000, at least 13 Nasdaq 100 companies—including Amazon, XO, Dish, and PeopleSoft—had been burning cash for a year. Yet investors continued buying shares in money-losing ventures like Pets.com and Webvan.

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“It was a land grab,” says Julie Wainwright, former CEO of Pets.com. The company received a major boost in 1999 when Amazon and other investors poured $50 million into it. “Within months, seven other pet-related startups got funded. That made no sense.”

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Pets.com went public in February 2000, but by November, it was bankrupt. Wainwright eventually found success with The RealReal, an online luxury goods marketplace that went public in 2019.

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The Dot-Com Bubble’s Collapse

A combination of factors led to the dot-com bust. The Federal Reserve raised interest rates to curb market speculation, while Japan’s recession stoked fears of a global downturn. As skepticism about unprofitable companies grew, the market plummeted.

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“They were right to be optimistic about the internet’s future,” says Jim Grant, founder of Grant’s Interest Rate Observer. “But were they right to pay 10 times revenue for Sun Microsystems and lose 95% of their money? No.”

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companies that survived the dot-com crash—like Amazon and Google (now Alphabet)—became industry titans. But many others vanished.

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“The internet’s adoption was gradual,” explains Rob Arnott, founder of Research Affiliates. “Back in 2000, we didn’t use it for everything like we do today.”

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Despite its transformative potential, the internet boom ended in a $5 trillion market wipeout. The technology was a great investment—but at the wrong time.

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Is AI Following the Same Path?

AI’s promise is immense. It could power digital assistants that handle daily tasks, revolutionize transportation, reshape education, and transform healthcare.

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But major disruptions take time, and the biggest winners often emerge unexpectedly. That’s a lesson Wainwright, the former Pets.com CEO, frequently reflects on. “All the real innovation came from small companies,” she says. “That may still be happening.”

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The unpredictability of AI’s future became evident recently when a Chinese-developed chatbot, DeepSeek, was unveiled. The news sparked a $589 billion selloff in Nvidia stock, as investors worried cheaper AI models might reduce demand for advanced computing hardware.

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This highlights why today’s tech giants are aggressively investing in AI, even at the cost of short-term profitability. Staying ahead in an industry evolving this rapidly is expensive—but they believe it’s a price worth paying.

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“I’ve seen almost every technological shift since 1980,” says Khosla, an early investor in OpenAI. “And AI is the biggest one yet.”

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