Is Big Tech’s soaring AI spending creating a bubble? Here’s what it means for stocks.

All three major U.S. stock indexes ended October on higher footing. - iStock

With stocks trading near record highs, Big Tech’s soaring spending on artificial intelligence has rekindled a passionate debate among investors: Is the market in another bubble?

Bulls argue that the rally in shares of tech companies, which has driven much of the market’s gains for the past two years, still has room to run. The bears warn that tech valuations have climbed too high and could collapse in a fashion that resembles the dot-com bust of the early 2000s.

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“There’s no way the market can manage to escape a severe correction, or outright bear market, if the tech trade heads south,” David Rosenberg, founder and president at Rosenberg Research & Associates and former chief economist at Merrill Lynch, said in a phone interview.

While market participants may not agree on whether the tech trade looks poised to go awry, it’s a double-edged sword that today’s stock market has become heavily concentrated in tech stocks. They are greatly lifting portfolios, but could create a lot of pain when they fall.

The information-technology sector’s weight in the S&P 500 index SPX recently surpassed 35% to reach an all-time high, according to Jeff Buchbinder, chief equity strategist at LPL Financial. That’s happened as Big Tech stocks have risen much faster than the rest of the market, giving them a larger share of the total value of the S&P 500, a market-capitalization-weighted index.

AI investment drove about two-thirds of the S&P 500’s profit growth in the third quarter and will be key to achieving the double-digit earnings growth that analysts expect in 2026, Buchbinder wrote to MarketWatch via email.

The chart below shows the sector weights in the S&P 500, with the tech sector XX:SP500.45 climbing to a record high.The information-technology sector’s weight in the S&P 500 is at an all-time high. - LPL Research

Buchbinder said he doesn’t think the stock market is in a bubble and that current market conditions look different from what investors experienced in the late 1990s.

Over the past week, investors paid particular attention as four out of the “Magnificent Seven” megacap tech stocks reported earnings, with results that spooked some investors while emboldening others. Microsoft Corp. MSFT, Amazon.com Inc. AMZN, Meta Platforms Inc. META and Alphabet Inc. GOOGL GOOG are expected to collectively spend $350 billion this year on AI-related expenditures — and they have all raised their capex guidances.

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Another factor that shaped the direction of stocks in the past week was Federal Reserve Chair Jerome Powell’s comment on Wednesday that an additional interest-rate cut at the Fed’s December meeting is not a “foregone conclusion.”

President Donald Trump also outlined a new agreement for a one-year trade truce between U.S. and China on Thursday.

Are we in a bubble?

Jeremiah Buckley, portfolio manager at Janus Henderson Investors, said that while stock valuations are lofty, they have been supported by strong fundamentals.

While growth stocks now trade at a wide valuation premium to value stocks, they have also been seeing a much higher premium in profitability, he noted.

The blue line in the chart below shows the relative price-to-book ratio — a valuation metric for growth stocks versus value stocks — while the orange line shows the difference in return on equity between growth and value stocks.- Janus Henderson Investors

LPL’s Buchbinder said in a recent note that, when compared with the dot-com era, most of the current spending has been concentrated in companies that have ample cash and pre-existing business models that generate robust cash flow — while very little capital has gone into companies that don’t have a strong business case, like the infamous Pets.com during the dot-com boom.

Rosenberg, who has been labeled as a “permabear” and remains best known for correctly warning about the 2008 financial crisis, disagrees.

“In the late 1990s, it wasn’t all about Pets.com. It was a broad technology bubble, and you had heavyweights that had profits, cash flows and real business models, like Microsoft Corp., Dell Technologies Inc. DELL, Intel Corp. INTC, International Business Machines Corp. IBM and Cisco Systems Inc. CSCO,” Rosenberg said in a phone interview.

“When the bear market emerged, these stocks went down between 60% and 80%, and we were in the penalty box for almost a decade,” he added.

Two-year lag?

Rosenberg argued that the stock market has been in a price bubble for more than a year, with valuations remaining stretched throughout that period.

He pointed to several signs indicating that valuations have become detached from fundamentals. For one, the cyclically adjusted price-to-earnings ratio, also known as the Shiller P/E ratio — a widely watched long-term valuation measure — rose above two standard deviations from its historical average in the summer of 2024. “The reality is that bubbles can last up to two years,” he said.

Also, to justify the current valuation of the S&P 500, earnings will have to expand 15% per year from now to 2030, which is double the historical norm, Rosenberg noted.

“The question isn’t whether AI will be transformational — we know it will be,” he said. “But will it really trigger that much of a deviation of the long-term earnings trend line [that it] will go through an elongated period where profit will be double what it normally is?”

“I think, even for AI and everything that it may well deliver, that’s going to be a pretty tough task,” Rosenberg added.

What to watch

This week, investors will be watching the ADP employment data and ISM services data scheduled for release Wednesday. These releases are particularly important, given the lack of government data during the shutdown.

Investors will be looking for clues from such metrics about the state of the economy — and especially the labor market, after Amazon said on Tuesday that it would cut 14,000 corporate staffers this year, and UPS said on the same day that it has reduced its work force by 48,000 employees since last year.

Investors also will be watching earnings from Palantir Technologies Inc. PLTR on Monday, Uber Technologies Inc. UBER on Tuesday, Qualcomm Inc. QCOM on Wednesday and DraftKings Inc. DKNG on Thursday.

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