You’ve likely seen headlines comparing today’s AI-driven market to the late 1990s dot-com era. Those headlines can be concerning, and we take those comparisons seriously. Let’s take a look at what’s different today, what deserves caution, and, most importantly, how we’re positioning your strategy to hold up across a range of outcomes.1 Where Valuations Stand
Stock prices have climbed, and by simple measures of “price versus earnings,” the market looks more expensive than its long-term average. That’s a reason for discipline. However, it’s also true that the broad market remains below the most extreme levels reached in the late 1990s. You can see this in the valuation charts that track the relationship between prices and earnings over time.2 |
What’s Different From the Dot‑Com Era
In March 2000, Barron’s magazine cover story, “Burning Up,” reported that 74% of 207 publicly traded internet companies had “negative cash flows” and at least 51 of those companies were projected to run out of money in the following 112 months. Today, in contrast, the largest parts of the market are producing real earnings, and overall profit margins across the major U.S. index remain above their five-year average. While that doesn’t remove risk, it does mean that prices are supported by business results that we didn’t see from some companies in the dot-com cycle. FactSet’s latest quarterly review provides a good snapshot.3 |
The Heavy Instrument Behind AI
A big reason certain companies have led is due to the build-out of AI “plumbing:” data centers, chips, software, and power. Government data shows manufacturing construction is reaching near record highs, with much of it related to chip factories, and rising business spending on information-processing equipment and software. Those are dollars going into real plants, servers, and tools that support future productivity.4,5 What Is the Federal Reserve Doing?
The Fed lowered interest rates for the second time on October 29 and said it will stop shrinking its bond holdings on December 1. That combination appeared to ease some pressure in financial markets without being a promise to keep cutting short-term rates from here. The message was that conditions warranted a modest step, and from here, the Fed would respond to the data.6, 7 What About the Government Shutdown?
Government shutdowns create uncertainty and lots of media coverage. Historically, markets have often overlooked them; returns during past shutdowns have been mixed, and many episodes have been flat to slightly positive. While not a forecast, it showcases that short-term political moves haven’t reliably driven long-term market outcomes.8 How We’re Managing Your Strategy
Our job is to make sure you and your overall approach remain on track. We continuously track a core set of signals, including earnings trends, profit margins, credit conditions, employment levels, and inflation, and we adjust our approach when the facts change. If you’d like to meet and discuss how your portfolio is positioned for both stronger and more challenging environments, please give us a call to schedule a meeting.9,10 Bottom line, we are on top of this, and we’re here if you'd like to discuss further. |
Sources: - Insights.com, October 08, 2025. "This Is How the AI Bubble Bursts"
https://insights.som.yale.edu/insights/this-is-how-the-ai-bubble-bursts Yale Insights
2. Yardeni.com, 2025. "Stock Market P/E Ratios"
https://yardeni.com/charts/stock-market-p-e-ratios/ Yardeni Research
The S&P 500 Composite Index is an unmanaged index that is considered representative of the overall U.S. stock market. Index performance is not indicative of the past performance of a particular investment. Past performance does not guarantee future results. Individuals cannot invest directly in an index. The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.
The term "Magnificent 7" refers to a group of seven influential companies in the S&P 500, including Apple, Microsoft, Alphabet (Google), Amazon, Nvidia, Tesla, and Meta Platforms.
The S&P MidCap 400 is a benchmark for mid-sized companies. The index is designed to measure the performance of 400 mid-sized companies,
The S&P SmallCap 600 is a benchmark for small-cap companies. The index is designed to track companies that meet inclusion criteria, which include liquidity and financial viability. - FactSet.com, October 31, 2025. "Earnings Insight"
https://www.factset.com/earningsinsight factset.com - Fred.StLouisFed.org, September 25, 2025. "Total Construction Spending: Manufacturing (TLMFGCONS) (manufacturing construction near record highs)"
https://fred.stlouisfed.org/series/TLMFGCONS FRED
5. Fred.StLouisFed.org, September 25, 2025. "Private fixed investment in information processing equipment and software"
https://fred.stlouisfed.org/series/A679RC1Q027SBEA FRED
6. FederalReserve.gov, October 29, 2025. "Statement"
https://www.federalreserve.gov/newsevents/pressreleases/monetary20251029a.htm Federal Reserve - Reuters.com, October 29, 2025. "Fed to end balance-sheet reduction on Dec 1, 2025; cuts rates by 0.25%"
https://www.reuters.com/business/finance/fed-end-balance-sheet-reduction-december-1-2025-10-29/ Reuters - Bloomberg.com, September 30, 2025. "What a US Government Shutdown Means for Markets"
https://www.bloomberg.com/news/newsletters/2025-09-30/what-a-us-government-shutdown-means-for-markets Bloomberg - Corporate.Vanguard.com, 2025. "Vanguard’s Principles for Investing Success"
https://corporate.vanguard.com/content/dam/corp/research/pdf/vanguards_principles_for_investing_success.pdf Vanguard
10. Morningstar.com, April 1, 2025. "Q1’s Biggest Lesson for Investors: Diversification Works"
https://www.morningstar.com/markets/q1s-biggest-lesson-investors-diversification-works |
