If the AI Bubble Bursts as the Dot-Com Did, History Says the QQQ Might Not Recover Until 2042

There's a lot of debate these days about whether AI is a bubble. I'm not going to argue either way. What I wanted to look at was what history says might happen if AI were a bubble that popped. If we look back at the dot-com bust, it took the Nasdaq 15 years to recover its prior peak. If history were to repeat itself, it suggests that the Invesco QQQ (NASDAQ:QQQ), an ETF that tracks the Nasdaq-100 index, wouldn't recover until 2042 if it popped within the next year.

I'm not predicting this will happen at all, as I'm bullish on AI and the Nasdaq-100. However, I still think it's a good idea to at least consider this potential scenario before allocating too much of a portfolio to one top ETF that has so much exposure to the AI megatrend.

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Bursting the bubble

The bursting of the dot-com bubble ranks as one of the biggest stock market crashes in history. The internet-driven rise in the Nasdaq Composite index started in 1995 when it was below 1,000 points. The tech-heavy index would go on to rise to a peak of 5,048 points on March 10, 2000, a more than 400% gain in about five years. The index subsequently crashed a gut-wrenching 77% from that peak, bottoming on Oct. 4, 2002, at 1,139.90. It took the Nasdaq 15 years to recover from this crash, finally reaching its prior high on April 24, 2015.

The primary factor causing the crash was the overvalued stock market. Many investors speculated that dot-com companies would eventually be immensely profitable, even though many weren't generating any revenue at the time. In late 1999, the Nasdaq traded at a price-to-earnings ratio of more than 200. The likely catalyst triggering the crash was the Federal Reserve's decision to raise interest rates, which constrained capital flows and made it more challenging for cash-strapped internet companies to raise capital to fund their operations.

Recognizing a historical pattern

There are some eerily similar patterns developing today. The tech-heavy QQQ is up more than 90% over the past three years, driven by AI-related enthusiasm. Meanwhile, the Nasdaq-100 currently trades at nearly 34 times earnings, up from 32 times last year, and above its historical average of 22.6 times over the last two decades.

Tech companies are investing heavily in AI, increasingly funding it with debt. Over the past year, U.S. hyperscalers, including Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL), Amazon, Meta, Microsoft, and Oracle, have issued a combined $220 billion in debt to fund data center development, chip purchases, and other AI-related investments. They'll likely continue to issue debt to fund their AI build-out. That's a concern, given that the Federal Reserve recently raised interest rates for the first time in three years and plans to continue hiking them to tame inflation.

Mapping the scenario

The Invesco QQQ Trust has a 68.5% allocation to tech stocks. That includes a meaningful allocation to hyperscalers (Alphabet, Amazon, and Microsoft are currently top-10 holdings) and AI chip giants (Nvidia, AMD, Intel, and Broadcom are in the top-10 holdings). So, if AI were a bubble, and it burst, the ETF would experience a meaningful drop.

If, for example, it followed the historical pattern of the dot-com bubble, here's what the shape of the decline-and-recovery would look like. An early 2027 peak would be followed by a decline into the 2029-2030 time frame. Meanwhile, a full recovery to that 2027 high wouldn't arrive until around 2042, if it followed the same 15-year recovery period.

Why history probably won't repeat

While there are some similarities between the dot-com period and the current AI boom, there are also some stark differences. Today's AI leaders aren't trying to figure out how to monetize this technology; they're already generating real revenue. For example, Alphabet reported a 24% revenue increase in the second quarter to $119.8 billion, while generating $40.8 billion in total income from operations, a more than 30% increase. The company highlighted in its earnings release that "Our AI investments are redefining what's possible across every part of our business." Alphabet noted that Google Cloud revenue growth accelerated 82% in the period, "driven by demand for AI infrastructure and AI solutions."

Even private AI start-ups like OpenAI and Anthropic are generating real revenue. OpenAI's annualized revenue run rate reportedly topped $40 billion recently. Meanwhile, Anthropic reached $65 billion in July (and it has reportedly been profitable for two straight quarters).

Strong AI-driven productivity gains and profitability are driving companies to invest so heavily in developing AI infrastructure and new AI-powered products and services.

It's important to keep risk in mind

While there are concerns about an AI bubble, even if it popped, we likely wouldn't see history repeat itself with a 15-year recovery period for an ETF like the QQQ. That's because today's AI leaders are highly profitable and are already seeing real returns from their AI investments. However, that doesn't mean we won't see a real correction at some point, even if I don't think we'll experience a crash-and-recovery period of dot-com proportions. That's why it's important to build a diversified portfolio to help buffer that risk.

Matt DiLallo has positions in Alphabet, Amazon, Broadcom, Intel, Invesco QQQ Trust, and Meta Platforms and has the following options: long December 2028 $650 calls on Meta Platforms, long June 2028 $180 calls on Amazon, short August 2026 $150 calls on Intel, short December 2028 $660 calls on Meta Platforms, and short September 2026 $280 calls on Amazon. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Broadcom, Intel, Meta Platforms, Microsoft, Nvidia, and Oracle. The Motley Fool has a disclosure policy.