Are we in a bubble? The AI boom in context

Key takeaways:

• AI boom built on fundamentals: Today’s technology leaders combine strong profitability, disciplined capital allocation, and self-funded growth—creating a more resilient foundation than past cycles.
• Real economic impact: AI-related investment in chips, data centers, and infrastructure is driving global growth, boosting productivity, and fueling a durable expansion.
• Advisor toolkit for AI: BAI, DYNF, and BALI demonstrate various approaches to gaining exposure to AI-driven growth while maintaining balance.

Technology stocks have powered markets higher since early 2023, fueled by optimism over the transformative potential of artificial intelligence (AI). But as the theme has continued to evolve, comparisons to the dot-com era have intensified. Concerns over an “AI bubble” are increasingly front of mind for clients: many AI-linked companies have seen significant valuation expansion, investment in infrastructure remains massive, and the AI value chain has grown more circular, with firms striking deals that blur the boundaries between customers, suppliers, and capacity providers.

While echoes of past exuberance are hard to ignore, a closer look reveals a fundamentally different landscape—one supported by real profitability, disciplined capital allocation, and broad-based adoption that are shaping where we see opportunities ahead.

Valuations grounded in innovation, not speculation

Unlike the speculative frenzy of the late 1990s and early 2000s, today’s technology leaders are anchored by fundamental stability. Strong profitability, steady cash generation, and healthy balance sheets provide a foundation for continued investment and growth. The S&P 500 Information Technology Index trades around 30x forward earnings today—elevated by historical standards, but well below the 55x multiple reached at the peak of the dot-com era. Importantly, valuations today reflect real revenues, proven business models, and the accelerating adoption of AI across industries.

Putting tech valuations into perspective
12-month forward Price-to-Earnings – S&P 500 Information Technology Index

Tech bubble returns far outpaced earnings—not the case today
Earnings growth and performance (%)

Another defining feature of this cycle is how it’s being financed. Most AI-related capital investment is funded through retained earnings and corporate cash rather than debt. This self-financing makes the sector more resilient to higher interest rates and less vulnerable to liquidity shocks. Many companies are investing from a position of strength, not speculation.

Real demand, real growth

AI is not just a technological trend; it represents an infrastructure transformation with growing macroeconomic significance. Global data center demand is expected to grow between 19% and 22% per year through 2030, driven by the surging need for high-performance computing and storage capacity.¹ Semiconductor manufacturers, cloud providers, and network infrastructure firms are investing heavily to meet this demand.

In total, AI-related capital spending, including chips, data centers, and related infrastructure, accounted for over 1 percentage point of U.S. Q2 2025 GDP and is emerging as a meaningful contributor to economic growth.² As companies across industries adopt AI to streamline operations and enhance productivity, this investment cycle is creating a powerful tailwind for the broader technology value chain.

Measured investor behavior and resilient markets

Investor behavior remains measured. In the late 1990s, equity markets were fueled by speculative inflows and retail exuberance. In contrast, today’s investors appear far more disciplined. Year-to-date, U.S. equity mutual funds and ETFs have recorded net outflows of about $45 billion, while technology funds have attracted a moderate $14 billion in inflows—a far cry from the $54 billion surge during the dot-com peak.³ This suggests that investors are approaching the sector with cautious optimism rather than unchecked enthusiasm.

And in fact – the average advisor may be meaningfully underweight technology stocks. The average moderate advisor portfolio we’ve analyzed has a 25.5% allocation to technology, a full 9 percentage points less than the S&P 500, and lower even than the MSCI ACWI’s 27.5%.

The average advisor is underweight technology stocks
Allocations to technology stocks, as of 9/30/25

This underweight may be an intentional response to concerns around stock market concentration, or it could be an unintentional consequence of overweights to small caps and/or dividend-paying stocks. After all, the Russell 2000 has less than half the tech exposure vs. the S&P 500, and the Dow Jones U.S. Select Dividend Index has just a 5% allocation to technology.

Portfolio ideas for capturing the AI boom

Those finding themselves unintentionally underweight technology, with an interest in focused exposure to our best ideas in AI, may be interested in the iShares A.I. Innovation and Tech Active ETF (BAI). Managed by Tony Kim, the strategy aims to provide actively managed exposure to companies leading and benefiting from AI, emphasizing growth with earnings discipline.

For those trying to balance income needs with upside capture, the iShares U.S. Large Cap Premium Income Active ETF (BALI) aims to generate consistent income through large-cap stocks and covered-call overlays while maintaining participation in equity market upside. The strategy is designed to provide balanced exposure to both growth and income, helping investors diversify income sources without leaning on style tilts that risk missing key areas of AI-driven market opportunity. BALI has an 8.2% trailing 12 month yield and a 35% allocation to tech stocks.

Tech allocations and Yields: HDV and BALI, as of 9/30/2025

For those intrigued by the upside but concerned by the downside, SpiderRock separately managed accounts can provide customized option overlay solutions that can mitigate downside exposure or generate additional income without altering core holdings.

Last: actively managed strategies like the iShares U.S. Equity Factor Rotation Active ETF (DYNF) can provide dynamic exposure across style factors, adapting as markets and cycles evolve. Designed to help portfolios capture opportunity as market leadership shifts, DYNF can complement more targeted AI exposures as a core equity solution focused on generating alpha through factor rotation. DYNF has a 39% allocation to technology today, but also has the ability to shift as markets dictate.⁴

Advisor playbook: navigating the AI opportunity

AI is reshaping industries, investment strategies, and the global economy—marking one of the most significant inflection points of this era. While it’s natural to question whether markets have moved too far, today’s backdrop looks fundamentally different from the late 1990s and early 2000s. Strong balance sheets, self-funded investment, disciplined capital markets, and widespread adoption all point to a more resilient growth cycle.

Pockets of exuberance may emerge, but the foundation of today’s technology rally remains grounded in earnings, innovation, and real-world productivity gains. For advisors, the focus now is on helping clients participate in this transformation effectively, balancing exposure to AI-driven growth with diversification and discipline across portfolios.

Erin Manifase contributed to this piece.