Irrational Exuberance and the AI Frenzy: Does the AI Boom Echo Dot-Com Mania?

Irrational Exuberance and the AI Frenzy: Does the AI Boom Echo Dot-Com Mania?

By Raj Chokshi, CPA, MBA, CFP®

Nearly three decades ago, Federal Reserve Chairman Alan Greenspan issued a cryptic warning that would become legendary: “How do we know when irrational exuberance has unduly escalated asset values?” The phrase, delivered in 1996, captured the feverish optimism of the dot-com era—a time when investors believed the internet would rewrite economic rules overnight.

History shows they weren’t entirely wrong. The internet did change everything. But before that transformation came a spectacular crash. Between 1996 and 2000, tech stocks soared to dizzying heights, with the NASDAQ climbing more than 200%. Greenspan’s caution didn’t stop the party; markets stayed irrationally high for years before reality struck. When the bubble burst, $5 trillion in market value evaporated almost overnight. Today, a similar question looms: Is artificial intelligence the new irrational exuberance?

From Silicon Valley boardrooms to Wall Street trading floors, AI is the hottest ticket in town. Global investment in AI will top $400 billion in 2025, and valuations for generative AI startups have skyrocketed—even when revenues remain negligible. Companies are racing to sprinkle “AI” into their branding, hoping to attract capital and credibility.  I was recently at the PGA golf store looking at putters (though nothing really improves my horrible putting!) and there were two identical putters, but one had AI on the name and it was $75 more. AI sells! 

The narrative is intoxicating: AI will transform every industry, automate every process, and perhaps even achieve human-level intelligence within a decade. It’s a story investors can’t resist. But as Greenspan warned, stories can inflate markets far beyond fundamentals.

The parallels are striking to the dot-com era. Back then, fear of missing out drove investors to pour billions into internet ventures with little more than a domain name and a dream. Today, the same psychology fuels AI bets. Media hype amplifies success stories, creating feedback loops of optimism. Talent wars rage, with AI engineers commanding salaries that rival hedge fund managers.

Yet, there’s a twist: Unlike many dot-com darlings that lacked real products, AI already powers tangible applications—from chatbots to drug discovery. The technology is real. The question is whether expectations are.

If history teaches anything, it’s that bubbles don’t burst overnight. Greenspan’s warning came years before the crash, and during that time, valuations soared unchecked. The same could happen with AI. Even if fundamentals lag behind the hype, markets can remain irrational for a long time—long enough for fortunes to be made and lost.

AI enjoys advantages the internet never had in its infancy: mature infrastructure, cloud computing, and massive datasets. But it also faces unique challenges—ethical concerns, regulatory scrutiny, and societal risks like job displacement. These factors could slow adoption or trigger backlash, adding volatility to an already frothy market.

AI is transformative, but revolutions unfold gradually—not overnight. The technology will reshape industries, but whether today’s valuations reflect that future or a speculative frenzy remains to be seen. For now, the exuberance feels familiar—and history suggests it could last longer than anyone expects.

So, the million-dollar question is how should we position our portfolio?  Not to sound like a broken record, but diversification is your best friend. This technology and the companies powering it are great companies and we should continue to own them, and at the same time we don’t want to get too concentrated in them either. Valuations outside of AI/tech are still reasonable, especially in small companies and international securities.  If the AI related frenzy continues, good news we own it, but we also rebalance the portfolio periodically to take gains off the table and reinvest in other reasonably priced areas. Diversification remains one of the most effective strategies for managing risk and seeking balanced growth over time. 

If you have any questions, feel free to reach out to your Bluerock Wealth Management Team.  

Wishing you and your family a wonderful holiday season!

Raj Chokshi, Partner and Wealth Manager

Hightower Advisors, LLC is an SEC registered investment adviser. Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.