Are We in a Tech Bubble? Lessons From the Past

The extraordinary rise in US technology stocks over recent years and the correction so far into 2025 have investors drawing parallels to the tech bubble burst 25 years ago. However, Goldman Sachs Research points out that there is a critical difference between the dominant tech companies of today and those that were part of the tech bubble in 2000: their valuations.

The tech bubble was primarily driven by exuberance around the commercialization of the internet, with the Nasdaq index increasing fivefold between 1995 and 2000. Within one month of the bubble bursting in March 2000, the Nasdaq index had lost over a third of its value, writes Goldman Sachs Research’s Chief Global Equity Strategist Peter Oppenheimer in a recent report.

In comparison, the big tech companies today are valued at less extreme levels and the fundamentals of the tech sector are stronger. Oppenheimer doesn’t believe the current tech stocks are in a bubble, but he says we can still learn valuable lessons from history.

What happened in the past tech bubble

The rise in tech stocks in the late 1990s was extraordinary in magnitude and compares with some of the biggest bubbles in financial history:

• 1630s – The Tulip Mania in Holland
• 1720 – The South Sea Bubble in the UK, and the Mississippi Bubble in France
• 1790s – The Canal Mania in the UK
• 1840s – The Railway Bubble in the UK
• 1873 – The Railway Bubble in the US
• 1920s – The Stock Market Boom in the US
• 1980s – The Land and Stock Bubble in Japan
• 1990s – The Technology Bubble, Global
• 2007 – The Housing/Banking Bubble in the US (and Europe)

Oppenheimer notes that when one iconic internet company made its initial public offering (IPO) in April 1996, its stock price shot from $13 to $33 within a single day, more than doubling the worth of the company. The markets were extremely enthusiastic over the new internet era, which had policymakers worried about the speed and scale of investor speculation.

By December 1996, the head of the Federal Reserve at that time, Alan Greenspan, famously warned of “irrational exuberance,” where he later lamented in February 1997 that "regrettably, history is strewn with visions of such 'new eras' that, in the end, have proven to be a mirage."

In the months following Greenspan’s warnings, shares in new dot-com companies rose exponentially, increasing the Nasdaq fivefold between 1995 to 2000. The price-to-earnings (P/E) ratio, which compares a company’s stock price to its earnings per share (EPS), spiked 200 times. It was significantly higher than the 70 times P/E ratio of Japan’s Nikkei index during the Japanese stock market bubble.

The tech bubble saw extravagant valuations in tech, especially in Europe

In 1999, 13 major large-cap stocks each increased in value by more than 1,000%, and another seven large-cap stocks each rose by more than 900%. This is similar to how one US chipmaker's value increased by more than 1,180% between its low in 2022 and peak in 2024.

Most equity markets peaked in March 2000 before freefalling within a month – the Nasdaq had lost 34% of its value. Over the next year and a half, hundreds of companies saw the value of their stock drop by 80% or more. It bottomed out in October 2002 where the Nasdaq had fallen nearly 80%.

Is there a tech bubble now?

Today’s speculation over artificial intelligence (AI) shares some similarities with the dot-com tech bubble – both driven by major tech innovations. One academic study, in a sampling of 51 major innovations introduced between 1825 and 2000, found that bubbles in equity prices existed in 73% of the cases. These bubbles grew when the innovation was more radical and publicly visible at the time of commercialization.

Oppenheimer believes the challenge, both now and then, is figuring out how to value the new innovation and identifying who will benefit the most (or lose the most). Bubbles form when the total value of companies involved in the innovation becomes much higher than the future potential cash flows they are likely to generate.

One key driver of bubbles in the past has not only been strong performance, but also rising valuations that reached a level that makes an unrealistic claim on future potential revenues. While tech stocks have risen sharply in recent years, they have not represented a bubble because the price appreciation has been justified by strong profit fundamentals.

Another phenomenon of the past decade is that tech profits have been increasingly concentrated in a small number of dominant companies. This is not unique – during the rise of the dot-com bubble in the late 1990s, a significant number of new entrants appeared, but after the bubble burst, many of those competitors disappeared, leaving a few dominant players in place. Several of the largest technology companies today are those that survived the tech bubble of 2000 and its violent shakeout.

While there was some evidence of bubble behavior in more speculative, non-profitable growth companies in the period before the US interest rate hiking cycle in 2022, many of these companies collapsed in value due to the higher cost of capital. Meanwhile, dominant tech firms quashed investor fears with strong balance sheets and high cash holdings.

That said, investing in the markets carries the risk of price fluctuations, and past performance is not indicative of future results.

What’s next for tech?

While the top tech companies of the 2020s will most likely stay dominant in their respective markets, rapid innovation in machine learning and AI could create a new wave of tech superstars as well as potential new products and services that have not been imagined yet. AI and robotics will not only help create these innovative companies but could also bring big changes and improvements to other industries beyond tech.

The speed of innovation is often associated with significant changes in broader society, seen in shifting social attitudes, consumer behavior, government policy, and business practices. These create new challenges and opportunities for companies adjusting to meet changing demands.