6 Stock Market Lessons from the Dot Com Bubble That Apply in 2025
Written by
G. Brian Davis
Edited by
Zuri Anderson
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In the late 1990s, mania over internet businesses created a stock market bubble. Tech companies added “.com” to their names and watched their valuations soar.
The Nasdaq skyrocketed nearly sevenfold to 5,048 — before the bubble burst in 2000 and it collapsed to a low of 1,139 in late 2002. It took 15 years for the Nasdaq to recover its previous high, finally crossing above 5,048 in March 2015.
The S&P 500 didn’t fare much better, recovering only slightly from the Dot Com bubble before the Great Recession hit and wiped out all those gains again. The S&P 500 only sustained its recovery after 2012.
Is history repeating itself with today’s AI boom? As you mull over your own investments, remember these lessons from the Dot Com era.
The ‘How’ of Transformational Technology Is Harder To Predict
Everyone knew the Internet would transform our economy and society. That much was obvious. But no one knew exactly how it would do so.
That should sound eerily familiar, amidst all the hype around artificial intelligence.
“Sure, AI is a real, transformative technology, just like the Internet,” observes stock trading expert David Capablanca. “That doesn’t mean every AI company will survive. Many companies are jumping on the bandwagon, adding ‘AI’ to their branding just to attract investors. Many or even most of them will crash and never come back.”
Speculation Leads to Overvaluation
Investors in the late ’90s bet heavily on any business pursuing an online presence or image. That led to outlandish price/earnings (P/E) ratios.
For example, investment advisor Bradley, Foster & Sargent points to Microsoft’s P/E ratio of 73 at the peak of the bubble, and Cisco’s exceeding 200. And those were real companies with significant tech advantages and earnings. They survived, unlike many of their competitors.
“Hype cycles always end in reality checks,” explained Fei Chen, investment strategist at Intellectia AI.
Investors need to fight the urge to follow the trends and instead focus on business fundamentals: Cash flow, top-line growth and sustainable margins.”
Picking Long-Term Winners in New Tech Is a Gamble
Thousands of companies saw huge spikes in their valuations in the late 1990s — only to declare bankruptcy by 2002. And millions of investors lost huge amounts of money on them.
“The excitement had inflated their values far beyond what was justified, and when reality set in, only the strongest companies survived,” Capablanca continued. “This is exactly what’s happening now with AI.”
Building on that theme, Chen adds: “In both eras, a lot of venture and retail capital flowed into untested challengers, many of which would never be profitable.”
Diversify Your Investments Instead
Rather than trying to pick individual winners in a “squid game,” where most contestants will die off, invest in the industry as a whole.
Buy exchange-traded funds (ETFs) in the sectors you think will come out ahead. Individual companies can rise and fall, and the fund will simply swap in the current performers.
Of course, the best time to do that is before industry hype takes hold. In today’s market, Chen recommends sticking to broad diversification beyond tech.
“During the early 2000s, investors who invested heavily in tech lost their wealth,” he said. “Now, investors should diversify across sectors and asset classes, especially when tech carries such outsized weight in stock indexes.”
Be Ready To Buy When the Blood Hits the Streets
By the end of 2002, it had become much clearer who the long-term winners would be in the “Dot Com” space. Most of the losers were either dead or dying.
That was a better time to buy shares of companies like Cisco and Microsoft — not 1999 when the mood was euphoric and the press buzzed and glowed. The right time to buy was when the mood was sour and the press was negative.
Justin Zacks, vice president of strategy at Moomoo Technologies, knows the winds change and that in bear markets, many once-promising tech companies get weeded out.
“Technology can change quickly and companies with a lead can quickly wind up behind,” Zacks said. “Look for the leaders when the dust settles after the post-mania crash.”
Higher Interest Rates Catch Up with Capital Markets
In the frothy markets of the late 1990s, the Federal Reserve realized money was too cheap. They reined it in by raising interest rates.
“People are still behaving like capital is free, but the Fed has been hiking rates for almost two years,” noted David Materazzi, CEO of trading platform Galileo FX. “Back in the Dot Com era, rates were rising, too. The market ignored it until it couldn’t anymore, and we have the same setup now.”
Granted, the present never matches the past exactly. Many AI companies today do generate real revenue, and some are more mature tech companies. But valuations remain high, and the Nasdaq’s P/E ratio jumped from around 18.5 in mid-2022 to nearly 34 today, per GuruFocus.
Investors who fail to learn from history are doomed to repeat it.
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