How The AI Bubble Could Burst. Lessons From The Dot-Com Stock Market Crash.

John Chambers isn’t too worried about an AI bubble, but the former Cisco Systems chief executive warns “there will be train wrecks” in the frenzy over artificial intelligence. David Barrett, CEO of the fintech company Expensify, echoed that sentiment, comparing going all-in on AI to gambling.

“You can make a lot of money gambling,” he told Investor’s Business Daily. “You can also lose a lot of money.” He compared the AI frenzy to a “house of cards.”

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What would the train wrecks look like? If AI is indeed in a bubble, how would it burst? S&P 500 gains of roughly 70% the past three years have made many question if the market has already run up too high.

Lessons Of The Dot-Com Stock Market Crash

Chambers and Barrett offer cautionary views informed by what they each went through during another hot trend that took the tech world by storm. That trend eventually triggered one of the most spectacular tech downturns in history, the dot-com stock market crash of 2000.

That was a tough time for Chambers, who said he “learned the hard way” from missing signs of a downturn and being forced to make deep cuts in the Cisco Systems (CSCO) workforce. Barrett, who was just starting his tech career, was so stunned by the market crash he said, “Holy s—, everything is collapsing!”

Discover Top Growth Stocks With IBD Leaderboard

Fears of another tech collapse have grown as experts point to parallels between the AI boom and the internet bubble of the 1990s. The stock market has been going basically sideways since November, unable to find clear direction. The Nasdaq has traded roughly between 21,890 and resistance around 24,000.

The worries got magnified in February when shares of AI powerhouses, led by Microsoft (MSFT), Meta Platforms (META), Amazon (AMZN) and Google-parent Alphabet (GOOGL), tumbled sharply — even after the behemoth tech stocks posted solid results. Even the blowout earnings reported by Nvidia (NVDA) on Wednesday, highlighted by a 94% net income jump, led to muted reaction on Wall Street.

Nvidia’s report “hit on all cylinders,” Bernstein Research analyst Stacy Rasgon said in a client note on Wednesday. “And yet the share price action, which has been unexciting as of late vs. others in the space, remained relatively muted in the aftermarket. We aren’t sure what else investors want to hear at this point. But we like what we heard.” After posting modest gains shortly after reporting results, Nvidia stock tumbled sharply, shedding 5.5% to close at 184.89 on Thursday.

Grim Prognostications For An AI Bubble

Investors have been hearing plenty of gloomy prognostications about an AI future. One of the most stunning ones went viral last week. A Feb. 22 research paper titled “The Global Intelligence Crisis” imagined a world devastated by the widespread use of AI. “What if our AI bullishness continues to be right … and what if that’s actually bearish?” the Citrini Research paper asked.

Meanwhile, the Nasdaq composite has acted eerily similar to the dot-com era. The AI-powered market has unfolded in often unpredictable ways. Yet even the stock market sell-offs in the 2020s seem to be echoing those in the 1990s at about the same cadence.

“There will be volatility, just like in every bull market,” Jessica Rabe, co-founder of DataTrek Research, said in a December report. But there are differences between today’s AI boom and the dot-com stock market. “These companies have much better fundamentals now than in the late 1990s,” she said.

How The Web Took Shape Before The Market Crash

The 1990s saw the first wave of startups that led to the commercialization of the World Wide Web, giving birth to powerhouse tech stocks such as Amazon and Google. The web transformed the internet into a widely used tool, sparking a Silicon Valley job boom and a wave of high-valuation IPO stocks.

To compare the ongoing AI trend with the dot-com boom, Rabe examined the 1,000 trading days from the start of 1995. They look remarkably close to the Nasdaq’s performance starting at its low in December 2022 through today.

Rabe uses 1995 as the starting point because the macroeconomic backdrop resembled the current decade. Just like in 2022, there was a Fed rate shock in 1994 after a period of low rates in the early 1990s.

AI Bubble: Clues From Nasdaq Data

By the mid-1990s, the web revolution was in full swing. On Aug. 8, 1995, the blockbuster Netscape IPO validated the internet as a commercially viable and investable platform, Rabe said. Netscape’s stock debut can be compared to the November 2022 launch of ChatGPT, which unleashed enthusiasm about generative AI and the current bull market in stocks.

The Nasdaq has so far followed its mid-1990s trajectory, comparing both its upward trajectory and occasional pullbacks, Rabe said.

By the end of 2025, about 750 trading days had passed from the Nasdaq’s low in December 2022. The index was up 129% in that time. Going back to December 1997, the index was up 104% from the start of 1995.

The tariff-driven stock market sell-off last year and the market’s quick rebound closely mirrored the V-shape recovery in the first and second quarters of 1997, she adds. Former Fed Chair Alan Greenspan’s “irrational exuberance” speech in December 1996 had rattled the market. “There was also Fed rate uncertainty given worries about a reemergence of inflation. All very familiar to the recent past.”

What does that say about the future stock market?

A Secular Bull Run In Stocks

After all, the Nasdaq soared 388% from the end of 1995 to its peak in March 2000.

“We think U.S. large-cap tech stocks are still currently early in a secular bull run driven by monetization opportunities around gen AI,” Rabe concluded. “And Q4 corporate earnings results and 2026 financial outlooks should drive their next leg higher.”

Could the AI bull run end?

A look at some similarities with the dot-com bubble and subsequent stock market crash offers important insights.

The dot-com bubble burst in March 2000 when the Nasdaq began plunging. Once high-flying startups like Pets.com and Webvan went under. Even tech giants like Cisco, Hewlett-Packard (HPQ) and Intel (INTC) reeled from the downturn.

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Dot-Com Failures In Early  2000s Market Crash

“I missed it and I didn’t respond quick enough,” Chambers recalled. “I’m disappointed in myself. I should have seen it. It was the worst year of my life.”

Many of the failed dot-com startups spent small fortunes on servers and networking gear, underscoring the role of tech hardware in the boom.

Instead of the current scramble for Nvidia AI chips and massive AI data center buildouts, tech companies in the dot-com era spent small fortunes on servers and networking gear, boosting the fortunes of such giant tech stocks as Cisco Systems and Sun Microsystems.

The craziness of the dot-com spending spree was underlined by former Sun Microsystems CEO Scott McNealy who recalled in 2002: "People with spiked hair were throwing money at us saying, ‘Where’s my server? Where’s my server?’ " (Sun, which was acquired by Oracle in 2010, never fully recovered from the dot-com market crash.)

Capex Exuberance In The AI Bubble

The ongoing AI spending bonanza propelled Nvidia stock and shares of other tech players to new highs, triggering worries of another dot-com-style capex exuberance.

“The chance of an air pocket at some point is probably 100%. But I don’t think it’s now,” Rasgon of Bernstein Research said in a 2024 interview with IBD. “I’m not really worried about air pockets this year. I’m not really worried about air pockets next year. 2026? I don’t know. We’ll see.”

Fast forward to 2026: It’s still unclear.

In his Wednesday note, Rasgon said the Nvidia report showed AI “demand showing zero signs of slowing, suggesting that despite fears, a peak may not be imminent. And Nvidia looks exceedingly well-positioned to capture that demand.”

The AI spending spree rages on, and so does the debate over whether it makes sense. Big Tech has signaled even bigger capex spending ahead. Google projected capex spend for 2026 will nearly double to up to $175 billion to $185 billion, well above Wall Street estimates.

“We think the resulting infrastructure footprint creates a meaningful moat that few (if any) can replicate,” Deutsche Bank analyst Benjamin Black said in a client note.

AI Fever Vs. AI Bubble Fears

But cautious views of the AI megatrend have also grown.

Monnes Crespi Hardt analyst Brian White called Google’s cloud business “a star performance,” but he also noted the “colossal capex planned for 2026.” White has a neutral rating for Google stock.

The tech giant is “taking AI fever to the next level,” he wrote. “The tone of the call was upbeat with Alphabet posting a strong 4Q:25 and rattling off a litany of AI milestones and metrics in what we view as a ploy designed to justify the company’s massive capex spending spree in 2026.”

The next day, Amazon joined the massive capex spending fray, boosting its 2026 target to $200 billion, higher than the Wall Street forecast for $146 billion.

“What we’re continuing to see is, as fast as we install this capacity, this AI capacity, we are monetizing it,” CEO Andy Jassy said on the earnings call. “It’s just a very unusual opportunity.”

Some analysts continue to give the Big Tech AI spending spree the thumbs-up.

AI Bubble: Market Got Spooked

Piper Sandler analyst Thomas Champion reiterated a buy rating on Amazon stock, telling clients. “We think building capacity is the right long-term move.”

But as Amazon stock joined a Big Tech sell-off,  Champion added: “The market seems spooked.”

There’s not much debate about a future in which AI will play a critical role. But there’s intense disagreement on how soon that future will arrive — and when the hundreds of billions being invested in AI will pay off.

AI proponents remain upbeat. Chambers said the battle for AI dominance will naturally feature winners and losers, and shifting positions and fortunes in the competition. And the pace of competition will be much faster than during the dot-com boom, he argued.

“It’s going to be a period of rapid change,” he said. “This market is moving five times the speed of the internet. So changes that you used to have to make in five years will occur in one.”

The AI battle could unfold in unpredictable ways. Take the way Google’s fortunes have changed in the last three years, Chambers said. Google “fell way behind in terms of AI leadership” shortly after ChatGPT launched in 2022. But the tech giant bounced back after moving “with tremendous speed.”

“Here we are three years later, and Google is coming back even stronger,” Chambers said. That’s another key difference between the dot-com boom and the AI frenzy, he said: “Usually when a company got into trouble before, they didn’t come back out of it.”

AI Bubble: 1996 Or 1999?

Wedbush analyst Dan Ives, one of AI’s most prominent Wall Street cheerleaders, argued in a January note that “tech stocks will be strong in 2026 as the next part of this AI Revolution takes hold.”

In February, as the slump in AI stocks appeared to gain momentum, Ives wrote: “This tech sell-off is way overdone.” He predicted “a tidal wave of AI-related spending from governments, Global 2000 organizations, and massive spending from the Asia/Middle East region with US Big Tech front and center as beneficiaries.”

Ives referred to the dot-com boom which kicked off in the mid-'90s before it turned into a bust a few years later. But he argued, “This is a mid-1996 Moment … and NOT a 1999 Moment.”

Does that statement suggest that the AI frenzy will eventually fade as the megatrend hits “a 1999 moment”? Some analysts believe that AI is already there.

“There’s no doubt we’re in some kind of bubble scenario,” Brian Hopkins, vice president of emerging technology at Forrester Research, told IBD. “We’ve seen this movie before, the only question is how does it end?”

AI Bubble Scenarios: From ‘Smooth Sailing’ To ‘Debt Bomb’

Hopkins sees several possible scenarios, including a “smooth sailing” path where the AI megatrend leads to a “softer landing.”

But other possible outcomes include a “logistical shock,” which would cover a range of issues including rising concerns about the impact of the AI data center buildout on power costs. Hopkins also pointed to regulatory and policy worries, including the ongoing trade disputes with China and the pushback against AI’s societal impact in Europe.

The worst scenario would be a “debt bomb,” he said. That’s “when OpenAI delays some orders, that hits Nvidia,” he said. “It also starts to hit Oracle (ORCL), begins to hit CoreWeave (CRWV). Clearly, data center financing glitches are all part of this.”

Market Crash Speculation: Return Of Nasdog?

Peter Berezin, chief global strategist at BCA Research, imagined in a speculative note published in December how an AI bubble could burst in 2026. The research note, titled “The Return of Nasdog,” focused on the massive capex spending at the center of the AI trend as it imagined how a crash would have unfolded this year: “2026 was the year the AI boom turned to bust. In retrospect, it should have been clear.”

“Tech companies justified this lavish spending on the grounds that AI would significantly boost their sales and profits,” he wrote. “As 2026 began, that assumption started to look increasingly shaky.”

Berezin used the dot-com crash as a reference point. “The 2001 recession was more the result of a stock market crash than the cause of one. The economic downturn that began towards the end of 2026 followed the same script.”

He made this stunning prediction: “As investors began to punish tech companies for spending more on AI capex, the flow of new project announcements dried up. By the end of 2026, many of the projects that had been announced to great fanfare in 2025 had either been shelved or rolled back.”

Artificial Intelligence In 2028?

Citrini Research imagined an even grimmer future by posing a different question: What if AI does lead to dramatic changes in the way the economy works?

The recent Citrini paper noted how the AI frenzy intensified this year. “The euphoria was palpable. By October 2026, the S&P 500 flirted with 8000, the Nasdaq broke above 30k. The initial wave of layoffs due to human obsolescence began in early 2026, and they did exactly what layoffs are supposed to. Margins expanded, earnings beat, stocks rallied. Record-setting corporate profits were funneled right back into AI compute.”

But the paper asked: Where will AI, with the stunning capabilities that the technology is supposed to usher in, take the economy?

“The owners of compute saw their wealth explode as labor costs vanished,” the paper said. “Meanwhile, real wage growth collapsed. Despite the administration’s repeated boasts of record productivity, white-collar workers lost jobs to machines and were forced into lower-paying roles. … In every way AI was exceeding expectations, and the market was AI. The only problem … the economy was not.”

AI Stocks To Watch

The companies that would be most damaged by an AI bubble pop are the largest suppliers: Nvidia, Advanced Micro Devices (AMD) and Alphabet, to name a few. Data center operators and suppliers would be next. Providers of electricity for data centers would fare poorly, too, along with nuclear power suppliers that are banking on ballooning electricity demand. Makers of memory chips and data high-speed connectors wouldn’t be spared.

The AI basket of stocks also includes companies capitalizing on data center growth with new businesses. For example, jet engine maintenance company FTAI Aviation (FTAI) is launching a new business to convert jet engines into power-generating turbines to generate energy for data centers.

What does it add up to? The potential impact would be huge just based on the Magnificent Seven stocks, which currently account for about 37% of the S&P 500.

“A 40% correction in these seven stocks, matching their 2022 decline, would automatically trigger a 15% S&P 500 drop before broader selling starts, impacting every index fund, retirement account and pension,” says a report from career portal Built In.

So much money is pouring into AI that a downturn will likely spread beyond tech. That’s what happened during the dot-com market crash. While it’s hard to build models on what a new tech bubble burst would look like, S&P Global reminded investors of just how bad things could get.

Economic Impact Of Dot-Com Market Crash

Annual GDP growth averaged 4.3% from 1996 to 2000. After the dot-com market crash, GDP gains ground to halt. GDP rose 5.4% in the second quarter of 2000, then slowed the next three quarters. It rebounded a bit in the second quarter of 2001, but the economy contracted 0.5% in Q3, which included the 9/11 terrorist attacks.

Five quarters later, however, the level of real GDP sustainably surpassed its pre-correction peak.

Barrett at Expensify (EXFY) acknowledges the importance of AI, but is critical of the current hype around the trend. “It’s a house of cards that can collapse very, very quickly, which doesn’t say it will,” he said. “It certainly could and I think it could certainly happen very fast.”

The road forward is so fuzzy that the market has been going through “big swings on very negligible information,” he said. “It could come down to as simple as some important person says we’re at the end of the runway for this technology. Then suddenly everything crashes. I think it’s that fragile.”

Market Action In The AI Era

In fact, big swings triggered by the artificial intelligence frenzy began shortly after the launch of ChatGPT.

In February 2023, Google stock plummeted, wiping out $100 billion in market capitalization in a single day after the giant tech stock fumbled the launch of a new chatbot that was supposed to be its answer to ChatGPT. A promotional video for the launch of Bard included an inaccurate claim. The error spooked investors worried that Google was falling sharply behind OpenAI. Google stock eventually bounced back.

Last week, IBM stock crashed after Anthropic suggested that its Claude Code tool can automate a key segment of Big Blue’s business. IBM stock recovered as analysts downplayed the threat.

While he remains upbeat about where AI is headed, Chambers, now a Silicon Valley venture capital investor and CEO of JC2 Ventures, also counseled caution. AI investors should think strategically, he says.

AI Bubble: ‘Tremendous Volatility’

“If you’re making your investments on AI a day at a time or a quarter at a time, I think you’re going to have a tough time,” he said. “Even the best at market timing do poorly. And so my projection for 2026 (is) I think the market will have an OK year, but it’s going to be a roller coaster like no other one with tremendous volatility.”

Berezin also stressed the importance of timing. “I think we have to be pretty humble in the sense that we’re never going to get the timing right,” he told IBD.

“Do you get out now, or do you wait until it’s clear that the music has stopped?” he said. “I guess it depends on how nimble you are. It’s a bit like asking, what should you do if you’re worried about an avalanche? Do you stay and enjoy the view because probably it’s not going to happen now. Or do you get out of the way in case it does happen now? Again, it depends on how nimble you are, how fast can you move?”

His advice to investors: “Keep your finger near the eject button.”

“The way people lose money in the stock market is by convincing themselves that there’s nothing to fear,” he said. “They end up just going over the waterfall.”

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