91����

You’d have to be living under a rock – or shall we say, in a bubble – not to have heard the rumors: Are we in an AI bubble? If you remember the dot-com bubble of the late ’90s-early 2000s or the housing bubble of the mid-2000s, you might be feeling a little déjà vu. So, should you be worried? And more importantly, what should you do about it?

��

BUBBLE-ISH? MAYBE. MAYBE NOT.

To be clear, we’ve never known for sure that we were in a bubble at the time it was happening. If we did, we would have, you know, not let it happen – bubbles are built on human behavior and beliefs.

So all we can do is make our best diagnosis based on the signals we’re seeing (not opinions or press releases). We’ll be honest: They’re mixed.

• The Magnificent 7 – a group of powerhouse U.S. tech companies (Alphabet/Google, Amazon, Apple, Meta, Microsoft, NVIDIA, Tesla) – have seen spectacular gains in the last few years and now make up over 35% of the S&P 500’s value (as of Oct. 31). That’s huge.
• Yes, they’re pricey. But compared to historical tech valuations, they’re not off the charts, with a combined price/earnings ratio of 31.4 (compared with a dot-com-era P/E ratio of over 120 in the tech-heavy Nasdaq).
• Unlike those of the dot-com era, these companies are profitable, generating strong cash flow, and they aren’t drowning in debt. Most of their profits come from existing businesses, not speculative AI ventures.
• And unlike the cheap borrowed money driving the housing bubble, today’s AI investments are mostly funded by cash.
• Some of the most inflated AI valuations are in private companies you likely don’t have access to invest in – think OpenAI and Anthropic. These firms are making massive deals for chips and cloud infrastructure, suggesting sky-high valuations. But here’s the good news: If those valuations crash, your portfolio won’t feel the direct hit.

The Magnificent 7 tech companies have risen dramatically

Source: Bloomberg, S&P Dow Jones Indexes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance does not guarantee future results.

��

BUBBLES AREN’T ALWAYS ALL BAD

Tech companies heavily invested in AI might look expensive – maybe even too expensive – but let’s also acknowledge that the tech is changing everything, from how we work to how we shop, learn and even create. As it does so, AI has the potential to reshape nearly every corner of the economy.

Tech races often follow a “winner takes all” pattern, which fuels fierce competition and massive bets.

And that can actually be good – and natural – for a capitalist economy. Sure, they’re painful for investors who go all-in on the wrong companies, not to mention the workers who lose jobs at shuttered businesses.

But bubbles also drive innovation. The dot-com crash wiped out many firms, but it also paved the way for the ubiquitous internet we rely on today. (If you’ve never experienced the pain of dial-up, ask your parents.) Capitalism thrives on this cycle: big ideas → big investments → shakeouts → progress.

And when it comes down to it, we believe capitalism, for all its flaws, is the best system humans have come up with to create technology that improves lives and connects the world. Bubbles, like occasional bear markets, may just be part of the deal.

��

SO WHAT SHOULD YOU DO?

In the end, we can’t tell you whether we’re currently in a bubble or not. But remember that, over the long term and despite occasional bubbles, the economy has kept growing – and historically the market has trended up a lot more often than down. So stay invested, stay focused on the long term and stay diversified.��