AI Spending Spikes: Is Big Tech Fueling a Market Bubble?

What Happened

The stock market is once again buzzing with a familiar, yet unsettling, question: Is Big Tech's insatiable appetite for artificial intelligence creating another bubble ready to pop? Investors are sharply divided as tech valuations climb to dizzying heights.

The technology sector's weight in the S&P 500 index recently soared past 35%, hitting an all-time high. This surge comes as giant tech companies have vastly outpaced the broader market, significantly boosting their share of the S&P 500's total value. Powering this expansion is a colossal commitment to machine-learning tools. Microsoft, Amazon, Meta Platforms, and Alphabet are poised to collectively inject $350 billion into AI-related expenditures this year, with all four giants already upping their capital spending forecasts.

This massive influx of AI investment isn't just a side note; it reportedly fueled about two-thirds of the S&P 500's profit growth in the third quarter alone. Analysts now anticipate double-digit earnings growth for the index in 2026, with artificial intelligence considered a key driver. Still, this heavy concentration in tech stocks presents a double-edged sword: while these companies are currently propelling portfolios upward, a downturn could inflict widespread pain across the market.

Bubble or Boom?

The debate rages on. Jeff Buchbinder, chief equity strategist at LPL Financial, dismisses the bubble narrative, arguing that current market conditions diverge sharply from the late 1990s. He highlights that today's AI spending is concentrated among cash-rich companies with robust, pre-existing business models. This contrasts starkly with the dot-com era, where significant capital flowed into speculative ventures lacking strong business cases, like the infamous Pets.com.

Jeremiah Buckley, a portfolio manager at Janus Henderson Investors, seconds this view, noting that strong fundamentals underpin current, albeit lofty, stock valuations. He points out that while growth stocks indeed command a substantial valuation premium over value stocks, they also demonstrate significantly higher profitability. This suggests that the market might be rewarding actual performance, not just speculative hype.

However, not everyone is convinced. David Rosenberg, founder of Rosenberg Research & Associates and a "permabear" renowned for foreseeing the 2008 financial crisis, firmly disagrees. Rosenberg contends the stock market has been in a price bubble for over a year, with valuations remaining stubbornly stretched. He points to the cyclically adjusted price-to-earnings (Shiller P/E) ratio, a critical long-term valuation metric, which surged more than two standard deviations above its historical average in mid-2024. Bubbles, he warns, can persist for up to two years before bursting.

Rosenberg also highlights a daunting requirement to justify the S&P 500's current valuation: earnings must expand an astounding 15% annually through 2030. This figure is double the historical norm, a "pretty tough task" even for the transformative potential of artificial intelligence. Furthermore, he reminds investors that even formidable, profitable tech heavyweights from the late 1990s—like Microsoft, Dell, Intel, IBM, and Cisco—witnessed their stocks plunge between 60% and 80% during the subsequent bear market, trapping investors for nearly a decade.

Our Take

The market's heavy reliance on a few Big Tech players, and specifically on the promise of generative AI, introduces a significant point of vulnerability. Should the enthusiasm for artificial intelligence wane, or if its real-world applications fail to meet the market's exceptionally high expectations, the broader S&P 500 could face a disproportionately severe correction. This outcome is a risk inherent when growth is so concentrated in a single, albeit powerful, theme rather than diverse economic expansion.

While optimists correctly note that today's tech giants boast far more substantial cash flows and proven business models than many dot-com darlings, Rosenberg's historical caution is poignant. The collapse of even robust, profitable tech companies in the early 2000s serves as a stark reminder: strong fundamentals alone do not guarantee immunity when market sentiment turns south during speculative periods.

Beyond the AI debate, investors also navigated other market signals last week. Federal Reserve Chair Jerome Powell indicated that a December interest-rate cut is not a "foregone conclusion," tempering rate-cut hopes. Meanwhile, significant job cuts at Amazon (14,000 corporate staff) and UPS (48,000 employees since last year) paint a mixed picture for the labor market, adding another layer of complexity to the economic outlook. Despite these varied signals, all three major U.S. stock indexes managed to close October on a higher note.

What's Next

The coming week will offer more clarity. Investors should closely monitor Monday's ISM manufacturing data, followed by ADP employment figures and ISM services data on Wednesday. These economic indicators are especially crucial given the recent lack of government data. Additionally, a slew of key tech earnings are on the docket: Palantir on Monday, Uber on Tuesday, Qualcomm on Wednesday, and DraftKings on Thursday. These reports will provide vital insights into corporate health and market direction amid the ongoing AI fervor.