More restrained than the dot-com bubble, yet more dangerous? BlackRock unpacks the truth behind the AI rally

Original Author: Monday, Deep Tide TechFlow

Deep Tide Introduction: BlackRock's latest report directly compares the current AI bull market to the 1990s internet bubble: U.S. tech stocks rose a cumulative 1097% from 1993 to 1999, while the AI rally from 2019 to the present has seen a cumulative gain of 569%. Although the gain is only half of that during the dot-com era, the S&P 500's Shiller P/E ratio has returned to 40 times (equal to the peak of the 2000 bubble), and tech stocks' share of the U.S. stock market capitalization has exceeded 37.5%, surpassing the internet bubble period.

BlackRock's conclusion: AI is not a bubble, provided that earnings growth can be realized.

In its latest weekly commentary released on July 7th, BlackRock directly addressed the market's hottest question: Is AI a bubble?

The answer from the world's largest asset manager is that the key isn't where valuations stand relative to history, but whether earnings growth can be sustained. Meanwhile, analyst Mike Zaccardi shared on X a data comparison chart from a BlackRock internal presentation, visually comparing the 1993-1999 internet bubble with the AI rally from 2019 to the present. The data source is Morningstar, as of June 30, 2026.

The conclusion is straightforward: The AI rally has accumulated a gain of 569%, just over half of the 1097% seen during the internet bubble. But more important than the magnitude of the gain is whether the fundamentals supporting this rally are more solid than they were back then.

Tech Stocks Up 569% in 7.5 Years, Internet Bubble Rose 1097% Over Comparable Period

According to data from Morningstar cited by BlackRock, U.S. tech stocks rose a cumulative 1097% over the seven years from 1993 to 1999, compared to a 292% gain for the overall U.S. stock market. Tech stocks achieved annualized returns of no less than 19.9% for seven consecutive years, reaching 78.1% and 78.7% in 1998 and 1999, respectively.

In the current AI market cycle from 2019 to June 30, 2026, tech stocks have posted a cumulative return of 569%, while the overall U.S. stock market returned 237%. This period included a significant drawdown in 2022 (tech stocks fell 28.2% for the year), but rebounded 57.8% in 2023, rose 36.6% and 24.0% in 2024 and 2025 respectively, and gained another 19.8% in the first half of 2026.

The divergence between the two cycles is evident in their latter stages. The internet bubble accelerated to its peak in the final two years, with cumulative gains in 1998 and 1999 approaching 200%. The acceleration phase of the AI rally occurred in 2023 (rebounding from the 2022 trough), but annualized gains have gradually narrowed since then. In other words, the pace of the AI rally is more restrained than the internet bubble, but market disagreement is growing over how far it is from a potential "blow-off top" phase.

Shiller P/E Returns to 40x, But Forward P/E is Only 21x

The S&P 500's Shiller CAPE ratio has climbed to 40 times, returning to levels seen during the internet bubble. This is a classic metric for gauging whether long-term valuations are overheating, calculated using inflation-adjusted average earnings over the past 10 years. A reading of 40x means investors are paying $40 for every dollar of long-term average profit, a level historically only reached around the year 2000.

However, BlackRock points out that the 12-month forward P/E ratio provides a more balanced perspective. Currently around 21x, valuations don't look as extreme because earnings expectations have risen in tandem with stock prices.

S&P 500 second-quarter earnings are expected to grow 23% year-over-year, marking the seventh consecutive quarter of double-digit growth. BlackRock emphasizes that such a pace of earnings growth is historically rare. BlackRock CIO Rick Rieder revealed at the CNBC CEO Summit on June 2nd that the Mag 7 tech giants currently trade at a P/E of 26x, with expected earnings growth exceeding 30% (composite growth ~27.6%). The S&P 500's forward P/E is 21x, with one-year earnings growth projections slightly above 20%.

The divergence between these two indicators creates the core market contradiction: long-term valuation metrics are flashing bubble signals, but short-term earnings momentum continues to support high valuations.

Tech Sector Market Cap Share Reaches 37.5%, Exceeding Internet Bubble Levels

According to Morningstar data, as of May 31, 2026, the technology sector's share of U.S. stock market capitalization reached 37.5%, surpassing levels seen during the late 1990s internet bubble. This figure does not yet include Alphabet and Meta, which are classified under the communication services sector, nor Amazon, categorized under consumer discretionary. Adding these deeply involved AI giants would result in even higher effective concentration.

Market leadership is spreading from the "Mag 7" to a broader set of AI beneficiaries. A new market acronym, "MANGOS," has emerged, representing Meta, Anthropic, Nvidia, Google, OpenAI, and SpaceX. The Morningstar Global Next Generation Artificial Intelligence Index rose approximately 45% cumulatively in April and May 2026, before retreating in June.

Concentration risk is one of the most similar features between the current market and the internet bubble. In late 1999, a handful of companies like Cisco, Intel, Microsoft, and Oracle dominated the Nasdaq's final sprint. While the profitability of today's AI leaders is far stronger than back then, the risk of a stampede effect among concentrated holdings remains real if earnings growth fails to meet expectations.

BlackRock's Core Thesis: Declaring a 'Bubble' is Itself a Major Bet

In its weekly commentary, BlackRock offers a noteworthy framing: Concluding that AI has become a bubble is itself a significant judgment, as it implicitly assumes that AI technology will not lead to sustained productivity and growth breakthroughs.

BlackRock believes AI offers the potential for a "permanent growth breakthrough" through accelerated innovation, but the investments required to build the future are reinforcing scarcity. Based on this, BlackRock's mid-2026 outlook focuses on three themes: AI Scarcity (power, grid, chips, and data center bottlenecks), Durable Income (short-duration credit assets), and Thematic Investing beyond traditional asset classifications.

BlackRock maintains an overweight stance on U.S. equities, favoring scarce inputs required for AI systems.

However, the opposing view is equally clear. Morningstar noted in its latest market briefing that tech sector concentration in the U.S. market has exceeded internet bubble levels, with concerns over high interest rates, high valuations, and overinvestment in AI becoming intertwined. Fidelity's research indicates that the current ratio of capital expenditure to free cash flow is below 1, meaning companies are primarily funding AI investments with their own cash rather than debt. This contrasts sharply with the internet bubble era, when the ratio approached 4x.

For investors, the core question has shifted from "How much more can the AI rally run?" to "How long can AI earnings growth be sustained?" BlackRock is betting on earnings delivery; bears are betting on a peak in earnings. The earnings season in the second half of 2026 will be the key window to test these two contrasting views.