Macro Markets and Machines_The Economic and Market Transformation Driven by AI_GWM report - Flipbook - Page 14
Macro, Markets, and Machines
November 2025
Section 2.3: But Is It a Bubble?
One cannot draw parallels between AI’s potential to improve productivity like the dotcom era without
addressing what came after. The late-1990s technology boom delivered a significant leap in productivity and
innovation, but it also ended in one of the most significant equity market downturns in decades with the
bellwether S&P 500 seeing a peak-to-trough decline of ~50% and even steeper losses in the tech-heavy Nasdaq
(Exhibit 9). The downturn was due to misplaced optimism about how quickly new technology would translate
into profits. Investors poured capital into countless untested companies, many of which had scarce earnings,
unproven business models, and valuations that reached extreme levels. When growth expectations failed to
materialize and credit conditions tightened, the tech bubble burst and numerous firms were wiped out.
Exhibit 9 – Equity Markets Saw a Significant Downturn When the Dotcom Bubble Burst
1800
1600
Dotcom peak
Peak-to-trough decline of ~50%
1400
1200
1000
800
600
1999
Dotcom trough
2000
2001
2002
S&P 500 index
Source: Bloomberg Finance LP; Scotia Wealth Management.
However, despite the market downturn, the Internet revolution did not end. In fact, it was just getting started.
While there were plenty of overhyped companies, the technologies underpinning the dotcom optimism had
merit and became the foundation of modern commerce and communication. Surviving businesses such as
Amazon and Microsoft leveraged the infrastructure that had been built to scale profitability in the decades
that followed. As such, although the market corrected and valuations compressed, the technology continued
to expand.
The parallels to the present are clear. Similar to over two decades ago, we are seeing accelerating capital
investment, concentrated equity market leadership, and elevated valuations among firms tied to a technology
believed to have transformative potential.
For instance, the stocks that have dominated equity market performance since 2023 have primarily been in the
technology sector, with significant gains in semiconductor stocks and a small subset of companies deploying
billions into the AI race, the Magnificent 7 (Mag 7) cohort. This has led to significant performance imbalance and
an increasingly concentrated equity market (Exhibit 10). This is undoubtedly a risk that investors should be
cognizant of, as a heavily concentrated market could result in outsized moves if one or several of these megacap companies disappoint on earnings in the future.
The interconnected nature of AI investments has also emerged as a risk as several of the big players are
simultaneously investors, customers, and suppliers in AI. For instance, Nvidia’s recent $100 billion investment in
OpenAI shows the chipmaker financing a company that relies on its GPUs to train and deploy LLMs. In other
words, it is reinvesting its profits back into a customer that in turn fuels more demand for its products. This loop
has supported these companies up until now and may continue to do so should demand for AI systems and the
associated parts and materials continue to rise. At the same time, it has also introduced an element of fragility,
as a shortfall in AI adoption or monetization could cause the loop to reverse quickly.
Scotia Wealth Management
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