MW The dot-com bubble peaked 25 years ago this week. Are investors today falling into the same trap?

By Joseph Adinolfi

The Nasdaq-100 took more than 15 years to return to its dot-com-era peak. One investor who saw the crash coming sees echoes in today's AI craze.

This week marks the 25th anniversary of the peak of the dot-com bubble.

In retrospect, there were signs that the market's breakneck advance would prove unsustainable. Former Fed Chairman Alan Greenspan had warned about "irrational exuberance" in the stock market as early as 1996.

But at the time, investors chose to ignore this warning. Instead, they increasingly fixated on the promise of the new technology, while largely disregarding fundamentals like sales, earnings and cash flow.

The S&P 500 SPX reached its dot-com-era high on March 24, 2000, when the index closed at 1,527.46. The Nasdaq-100 NDX would follow a few days later, on March 27, when it closed at 4,704.73. Meanwhile, the Nasdaq Composite COMP had hit its own record high a couple of weeks earlier, on March 10, while the Dow Jones Industrial Average DJIA peaked in January of that year.

As millions of Americans probably remember, the prolonged period of euphoria ended in tears. Trillions of dollars' worth of market value were wiped away in the ensuing bear market, which lasted more than two-and-a-half years. During that time, the Nasdaq-100 would fall by more than 80% from its peak.

Along the way, the Sept. 11, 2001 terrorist attacks and major accounting scandals like the one that led to the collapse of Enron Corp. would further dent investors' confidence in the market.

'The sky was the limit'

Professionals who were working during the dot-com era remember it as a period of unfettered optimism. A time when everybody, from cab drivers to newspaper kiosk workers, was eager to talk stocks.

"It was certainly a time when everybody thought that the sky was the limit, that it was a new era, so valuations didn't matter, and the only thing that did matter was how much have you put into it, because it was just going to continue to climb," said Sam Stovall, chief investment strategist at CFRA, during an interview with MarketWatch.

But the reality check was swift and painful. The Federal Reserve had started raising interest rates in early 1999, ultimately setting the stage for a mild recession that would follow in 2001, according to the National Bureau of Economic Research.

While this helped set the stage, warnings from several dot-com companies that metrics like eyeballs and clicks weren't yielding the kind of revenue they had anticipated delivered the final prick, Stovall said.

A 15-year round trip

Stocks rose quickly during the roaring five-year bull market that preceded the dot-com peak. The S&P 500 tallied five straight years of strong double-digit gains.

But recovering from the bear market that followed would take much longer.

The S&P 500 finally returned to record territory in May 2007. But more than 15 years would pass before the Nasdaq-100 and Nasdaq Composite would achieve a comparable comeback.

               Index             Dot-com bubble peak close date  Dot-com bubble peak close  Dot-com bubble trough close date  Dot-com bubble trough close  Peak-to-Trough Performance  Recovery Date  Number of Years to Recover 
   S&P 500                                             3/24/2000                    1527.46                         10/9/2002                       776.76                      -49.1%      5/30/2007                         7.2 
   DJIA                         1/14/2000                                          11722.9810/9/2002                                               7286.27                      -37.8%      10/3/2006                         6.7 
   Nasdaq Composite             3/10/2000                                           5048.6210/9/2002                                               1114.11                      -77.9%      4/23/2015                        15.1 
   Nasdaq-100                   3/27/2000                                           4704.7310/7/2002                                                804.65                      -82.9%      11/3/2015                        15.6 
   Invesco QQQ Trust, Series I  3/24/2000                                            117.88                         10/9/2002                        20.06                      -83.0%       9/7/2016                        16.5 

Source: Dow Jones Market Data, all values based on closing levels

As the bubble began to deflate, the Nasdaq-100 booked back-to-back months of double-digit losses in April and May 2000, according to FactSet data. But the S&P 500 wouldn't officially enter bear-market territory, defined as a drop of 20% or more from a recent high, until March 2001, roughly one year later, Stovall said.

High valuations

The dot-com era is best remembered for the outlandish valuations assigned to trendy startups that boasted plenty of hype, but little actual revenue - companies like Webvan, Boo.com and Pets.com.

Telecom stocks also benefited handsomely during the runup due to the perception that they were selling the "picks and shovels" of the internet revolution.

Right around the peak of the mania, Cisco Systems $(CSCO)$ briefly became the most valuable publicly traded company in the world. While Cisco has survived, it has yet to return to its dot-com-era heights, according to FactSet data.

Several of its competitors weren't so lucky. During the ensuing crash, companies like Global Crossing, NorthPoint Communications and WorldCom all ultimately filed for bankruptcy protection. WorldCom was caught up in an accounting scandal that earned the firm's chief executive a lengthy prison stretch. By the time the dust had settled, the assets of many of these companies were bought out of bankruptcy by now-dominant players like Verizon Communications Inc. $(VZ)$ and AT&T Inc. $(T)$.

Another tech-fueled bubble?

At least one investor who managed to anticipate the dot-com bubble told MarketWatch that he sees echoes of it in the AI craze that has dominated the U.S. equity market over the past couple of years.

Based solely on performance, the Nasdaq-100's advance since the launch of ChatGPT in November 2022 has synched up nicely with its performance between August 1995 and the bubble peak. That month, Netscape went public, ushering in the start of the dot-com era.

James Stack, president of InvesTech Research and Stack Financial Management, an independent wealth-advisory firm, published a report warning of the possibility of a stock-market bubble back in 1998. The report would ultimately prove prescient, if a touch early.

Although there are differences as well, Stack is worried that investors today might be falling into the same trap.

"We don't have these extreme valuations for small startups," Stack told MarketWatch during a discussion of the similarities and differences between the AI hype and the dot-com boom.

"But people tend to forget that even the big stocks like Cisco lost 60% to 70%. You don't have to be in those speculative extremes to get hurt."

To be sure, valuations for AI darlings like Nvidia Corp. $(NVDA)$ and its peers have eased since the summer. But high valuations aren't the only reason Stack said he recently moved his clients' portfolios to be nearly 50% in cash.

"The other similarity that you have today that is perhaps as ominous is this type of complacent confidence," he said. "There's a confidence that the market cannot go backwards."

"That's when the average investor is most exposed."

-Joseph Adinolfi

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March 24, 2025 16:07 ET (20:07 GMT)

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