Several key investment headlines were noteworthy in October 2025. The S&P 500 reached another all-time high on October 28th. The optimism around artificial intelligence (AI) continued to propel markets higher. Additionally, corporate earnings generally appeared strong, due to the resilience of the U.S. consumer and data suggesting overall economic conditions remaining healthy. Another newsworthy event was the Federal Reserve cutting interest rates by 25 basis points, as markets expected. But, more importantly, was a statement made by Chairman Jerome Powell at the post meeting press conference. Powell pushed back on the notion that future interest rate cuts were a certainty as many Fed members remained somewhat concerned about the inflation outlook. The Consumer Price Index (CPI inflation) showed a 3% year-over-year increase in its latest release.
Are we in an AI-driven market bubble?
Market bubbles (and subsequent crashes) are relatively simple to understand in hindsight, but nearly impossible to forecast. Rather than attempting to predict whether we are in a bubble or not, we would like to provide some context.
Historically, market bubbles have been fueled by market speculation and irrational investor behavior, with the driving forces including cutting-edge technologies, abundant credit availability, excess leverage, greed, the arrival of new market entrants, and the emergence of innovative investment products. Recent fears of a market bubble have become more widespread, attributed to various key factors including historically elevated equity valuations, large amounts of AI capital spending, and disparate performance between markets and the more fragile real economy. (See last month’s newsletter on this topic: https://caplancapital.com/the-continuous-game-of-tug-of-war-record-equity-markets-vs-weak-economic-data/) Also, more ambiguous signs of market froth and overvaluation may include historically high S&P 500 concentration in technology-related companies, and record valuations in alternative asset classes including cryptocurrencies, precious metals (including gold which has now retreated from all-time highs), and even recent transactions for professional sports teams.
To better understand the breadth of concern, there have been some notable comments voiced by corporate executives, market historians, and influential investors recently on this topic:
Sam Altman (CEO of OpenAI): “When bubbles happen, smart people get overexcited about a kernel of truth.” He later said “Are we in a phase where investors as a whole are overexcited about AI? My opinion is yes.”
Jamie Dimon (CEO of JP Morgan Chase): “You have a lot of assets out there which look like they’re entering bubble territory.”
Ben Inker (head of asset allocation at GMO, a large asset management firm): “We’re certainly seeing lots of evidence of bubble-like behavior in the AI space. We see the kind of circular revenue deals, we see a lot of very aggressive price behavior.”
Ray Dalio (founder of Bridgewater Associates, a leading global hedge fund): “There’s a lot of bubble stuff going on.”
Historical Perspective
One may seek context in understanding how to identify market bubbles by examining historical examples. In retrospect, the late 1920s and the late 1990s are two periods that have parallels with today’s market.
1920s: The “Roaring Twenties” was a period of great optimism and technological innovation for the U.S. economy. Consumers were acquiring many new innovative products such as radios, automobiles, and household appliances. However, by the latter half of the decade, many key industries such as steel, farming, and housing were slowing down. The stock market however, shrugged off the sluggish economy and the S&P 500 returned +37.49% in 1927 and +43.61% in 1928.
One of the distinguishing features of the 1920s stock market was the emerging participation of small investors. Until then, stocks were mostly owned by wealthy Americans and corporations. As markets rose throughout the decade, smaller investors were taking advantage of “leverage” (borrowing funds to purchase more stock than otherwise affordable) with the expectation that stock prices would always rise. Exorbitant amounts of capital pushed highly valued stocks even higher, leading to a market bubble and subsequent market crash in 1929. This event was followed by the Great Depression.
2000 Internet Bubble: The stock market was driven by a single theme in the 1990s – the internet. The internet was perhaps the most influential new technology since the automobile. Individuals and businesses now enjoyed quicker ways to communicate and had access to large quantities of information instantaneously. As the internet became the driver of new technologies and applications, entrepreneurs rushed to create online companies as capital was flowing freely to them. Seeking to join the growth of the internet startup phenomenon, investors acquired almost any stock related to the internet, pushing the stock prices of these nascent companies to unprecedented valuations.
Between the years of 1995 and 1999, the S&P 500 rose over 20% each year while the Nasdaq registered much larger gains. The Nasdaq rose 85.31% in 1998 and 101.95% in 1999. Like the 1920s, consumer sentiment was strong, and speculation swept markets. Even Fed Chairman, Alan Greenspan, called the euphoric market sentiment as “irrational exuberance” as stock prices rose above their fundamental values. Companies, including ones without proven business models and/or those that lacked profitability, saw their stocks move dramatically higher with the hope of large profits in the future. The speculative internet bubble popped in 2000, as the Nasdaq 100 was down 36.84% in 2000, 32.65% in 2001, and 37.58% in 2002.
Parallels with Today’s Market
Markets today share many similarities with the late 1920s and 1990s. Like the 1990s internet phenomenon, AI innovators have promised game-changing efficiencies and use cases. Thus, stocks directly in the AI space have dominated the market, while companies facilitating the continued growth of AI (data centers, energy, electricity, critical minerals) have seen strong investor interest. This has led to highly concentrated stock market indexes and market valuations well above historical averages.
The 1920s also had transformative technologies. But perhaps more influential during that period was the rise of retail investors who became major market participants. Today, with many new online investment platforms targeting retail investors, opportunities to participate are omnipresent, whether in direct stocks, options, or ETF’s, often using leverage to compound the opportunity. As many smaller investors seek to compound their wealth quickly (sometimes ignoring the risk), they have pushed many stocks and cryptocurrencies to once considered unfathomable valuations.
What a bubble would mean for your portfolio?
Even if one has the foresight to predict whether we are in fact in a bubble, the portfolio implications would still be impossible to predict, given the uncertainties around the magnitude and timing. Therefore, there are a few fundamental investment concepts that should be employed in every portfolio, regardless of one’s precise goals and financial situation.
Don’t put all your eggs into one basket. Historical market bubbles have taught us that taking large stakes in specific stocks or sectors can produce highly disappointing results when conditions deteriorate. Some techniques that may help reduce the risk of a portfolio becoming too concentrated in a specific stock or sector include employing a disciplined risk management process and continuing to rebalance.
Stay in your lane. Joining the hype for “fear of missing out” can lead to poor decisions and unfavorable outcomes. Lack of focus on risk management can negatively alter one’s financial plan and investment goals. While it may be hard to stay the course at times, it is a crucial part of successful portfolio management and financial planning.
Valuation matters. In bull markets, many market participants tend to place more emphasis on momentum than valuation. But most assets have intrinsic value and paying substantially more than an asset’s estimate true value has often led to disappointing future results.
We do not know whether we are in an investment bubble. But we do know that crashes and corrections will occur from time to time. Therefore, it is crucially important to plan and prepare one’s portfolio for adverse market events, helping reduce the risk that one’s financial plan and long-term goals get turned upside down.
This newsletter is provided for informational and educational purposes only and should not be construed as individualized advice or a recommendation of any kind. Individuals should consult their own financial professional regarding their specific circumstances and needs.
Any forward-looking statements or opinions are based on current market conditions and expectations, which are subject to change and may not occur. The information provided is believed to be reliable, but its accuracy, timeliness, or completeness cannot be guaranteed. It is provided “as is,” without any express or implied warranties. Quotes or opinions from third parties are provided for informational purposes only and do not constitute endorsement or recommendation.
There is no assurance that any investment, plan, or strategy will be successful. Diversification and rebalancing do not guarantee profit or protect against loss in a declining market. Investing involves risk, including the potential loss of principal. Past performance is not indicative of future results. Index performance is for illustrative purposes only. You cannot invest directly in an index.
Investment advisory services are offered through Mariner Independent Advisor Network (MIAN), an SEC-registered investment adviser. Caplan Capital and MIAN are not affiliated entities. Registration of an investment adviser does not imply any level of skill or training.