Apart from the sharp selloff tied to the “Liberation Day” tariff announcement, U.S. stocks posted a banner year in 2025—largely driven by Technology stocks and the ongoing AI trade.
The strong performance has many investors concerned. The phrase “AI bubble” made the rounds in the second half of last year, with comparisons to the late 1990s tech boom becoming increasingly common. It’s a fair position to bring up for debate—valuations are elevated, enthusiasm is widespread, and capital spending tied to artificial intelligence is accelerating.1 Market bubbles happen when asset prices become untethered from underlying fundamentals, and importantly, from free cash flow. So the question for investors today is, have we reached that point in this cycle? To answer that question, it is useful to look back to the late 1990s to understand what other forces were at work in creating bubble-like conditions. In that period, we saw soaring valuations like we do now, but those valuations were also accompanied by dramatic economy-wide distortions: an unprecedented investment surge, declining corporate profitability, rising leverage, widening credit spreads, and growing financial imbalances that eventually helped tip the economy into recession.
In our view, many of those warning signs are not yet visible today, but it’s important for investors to continue to look for them. Let’s start with the investment piece. Capital expenditures (business investment) from hyper-scalers have surged since generative AI went mainstream in late 2022, and AI-related investment is now a key component of total investment across the economy. But the scale and persistence of that spending remain well below what defined the late stages of the tech bubble. Relative to GDP, AI investment is smaller than the telecom and technology buildout of the late 1990s, and it has not yet been sustained for the multi-year stretch that ultimately proved destabilizing back then.
Profitability also tells an important story. In the 1990s, corporate profit margins peaked in late 1997 (see chart below) and then quietly eroded as wages rose and unit labor costs climbed. As corporate profitability fell, the Nasdaq continued to soar. Today, the opposite dynamic is in place. Corporate margins remain elevated, earnings growth has been resilient, and wage pressures have eased rather than intensified. Productivity growth has improved recently, though it is still too early to attribute most of that gain directly to AI. Crucially, there is no clear evidence yet that AI-related investment is undermining profitability at the macro level, as seen on the chart below.
Balance sheets further differentiate this cycle from the last one. During the tech bubble, investment increasingly relied on debt, pushing the corporate sector into financial deficit and weakening balance sheets. Today, most large AI-linked companies are funding expansion primarily through internal cash flows. Leverage has risen modestly, but from historically strong starting points, and the corporate sector as a whole remains in surplus.
1 Haver Analytics, Goldman Sachs Global Investment Research, November 9, 2025.
2 Fred Economic Data. December 23, 2025. https://fred.stlouisfed.org/series/A446RC1Q027SBEA
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