Reading the Markets: Do Stock Market Bubbles Shatter Dreams or Propel the Economy?

This business requires all of us to read a lot. Like you, I appreciate the rigor of solid research, the suspense of a good plot unfolding, and the beauty of a perfect sentence. In this series called Reading the Markets, I’m excited to share my thoughts on some of the interesting ideas I discover.

I was reminded this month that my best commentary ideas often come from the intersection of engaging conversations with clients and what I’m reading.

I recently spoke with the chief investment officer of a $900 million independent registered investment advisor in Maryland who has a unique perspective on a question investors and clients ask me a lot — “Is all the money that businesses and consumers are spending on Artificial Intelligence (AI) creating a bubble?”

Interestingly, this client had worked in the telecom industry during the bubble days of the 1990s and later became an analyst covering many of these companies. And, what he’s observing today with AI brings him back to the excesses of the fiber-optic and dotcom era, when companies spent more than $30 billion putting cables into the ground. More than 90 million miles of fiber-optic cable were laid before the bubble burst, but in 2001 it was estimated just 5% of the cable was being used.¹

Stock Market Bubbles Have a Silver Lining

Discussing the potential for an AI bubble with our client reminded me of a book I read years ago, Pop: Why Bubbles Are Great for the Economy by Daniel Gross. Written after the technology, media, and telecom (TMT) bubble burst, Gross’ thesis is that bubbles often lay the foundation for the next great leg of innovation, creativity, new businesses, and new industries. Bubbles, he writes, are a primary engine of "America's remarkable record of economic growth and innovation."

All that unused extra fiber-optic capacity from the TMT bubble, for example, delivered the universal broadband and high-speed Internet that has enabled companies like Google, YouTube, Amazon, Netflix, and so many others to be created and thrive.

In his book, Gross details how many bubbles in American history have resulted in "usable commercial infrastructure" that consumers and businesses quickly put to new uses. He points to how the thousands of miles of rail laid before the railroad boom went bust made national consumer brands possible by giving consumers access to distant stores like Montgomery Ward and Sears Roebuck.

And in the wake of the 1929 market crash, the SEC and FDIC were created to stabilize the US financial system and restore investor confidence. Importantly, these agencies also produced a competitive and innovative capital markets environment that supported the creation of new investment products — which contributed to the US becoming the world's economic superpower.

What’s Next for AI?

I wrote recently how AI and its use cases are ushering in a prolonged and unprecedented productivity miracle. In fact, AI is such a powerful game changer that it could even contribute to insulating the economy from recession if the Fed leaves rates too high for too long.

As Nvidia, Microsoft, OpenAI, and Alphabet soar, I wonder what they might be laying the foundation for — what new industries, innovations, or companies will emerge to deliver long-term economic benefits and present future opportunities for investors?

I don't know if AI will be a bubble or not. History suggests that as we get overly enthusiastic, we spend more. Perhaps too much. But I'm suggesting that an AI bubble may not matter if investments aren’t wasted.

Taking a page from Gross’ research, any excess capacity could be used in creative and thoughtful ways to build new industries and new businesses. This excites me as an investor, to try to identify what those future industries and businesses might be and how to get exposure to them. What do you think — do bubbles create problems or possibilities?