Quarterly Client Letter: 2025 Q4

It has been nearly three years since the arrival of OpenAI’s ChatGPT-3.5, marking generative AI’s watershed moment. Suddenly, algorithms could produce text, computer code and images comparable to human output—and an AI investment boom was underway. Fast-forward to today, when the investment news is filled with comparisons to the dot-com bubble of the late 1990s and questions about whether the boom may soon turn to bust.

As in the late 1990s, a transformational technology has sparked enormous enthusiasm and aggressive capital expenditures (capex). For 2025, big tech spending clocks in at an estimated $400 billion. Building the infrastructure required to support this technology is expected to cost $3 trillion through 2028. Some worry that the technology ultimately will not provide enough value to justify the investment. OpenAI, for instance, is planning a $500 billion data center project, even though the company will generate only $13 billion in revenue in 2025.

Yet there are important differences between 2025 and 2000. Unlike the speculative companies of the dot-com era, today’s biggest public technology firms are highly profitable and funding capex out of substantial cash flows. And while valuations are elevated, they’re not at the extremes seen in 2000. The S&P 500 Information Technology Index recently traded around 30 times forward earnings, well below the dot-com era peak of 55.

Should You Worry About a Bubble?

Reasonable arguments exist on both sides of the bubble debate. But long-term investors don’t need to pick a side. Correctly identifying a bubble is extraordinarily difficult—and it’s unnecessary.

Your job is not to figure out whether a particular market is moving too far, too fast. It’s to invest in a way that gives you the best chance to reach your long-term goals. The key to that task is to build and maintain a portfolio that can keep you on track toward those objectives across many different market environments, including both booms and busts. That means diversifying across asset classes, sectors, company sizes and geographies.

Diversification to Balance Risk and Potential Reward

Many investors assume their stock holdings are well diversified if they track the S&P 500. However, the so-called “Magnificent Seven”—seven of the index’s largest technology companies—now account for roughly 35% of the index. Those same companies represent about 30% of all capex within the S&P 500, a huge portion of which is AI-related. In other words, mirroring the S&P 500 means you’re betting a significant chunk of your future on AI-driven growth. If the boom hits a speedbump, you might be over-exposed to the downside.

Diversification can help limit the risk of this type of concentration. The dot-com bust offers a useful case study of the ways small-cap and international equity allocations can help reduce the impact when large growth stocks decline.

The dot-com bubble burst in March 2000, sending large growth stocks into a freefall. Over the five years through March 2005, the Russell Top 200—the market’s 200 largest stocks by market capitalization—lost more than 25%.[1] Meanwhile, the Russell 2000 index of small caps did almost exactly the opposite, gaining about 23%[2] over the same time period. International stocks also outperformed, beating U.S. stocks between 2000 and the 2008 financial crisis. The upshot: Investors with diversified portfolios had a very different, less turbulent experience than investors who concentrated on the stocks that dominated the indexes at the end of the ‘90s. Spreading their investments around may have supported their account balances during the first half of the 2000s, possibly leaving them with more assets to benefit from subsequent gains.

We’re not predicting that history will repeat itself. No one knows what the future holds. The point is that market leadership can change, sometimes abruptly, and a diversified portfolio is designed to withstand those changes. With a diversified portfolio that’s built around your goals, you don’t have to predict when or why such shifts will occur.

Bubbles are clear only in hindsight. Diversification, on the other hand, works in real time. And it remains one of the most effective tools you have to navigate uncertainty. As the new year begins, if you have any questions about market movements or your portfolio, don’t hesitate to reach out.

[1] Cumulative return calculated from -5.73% annualized return for the five years through March 2025.

[2] Cumulative return calculated from 4.30% annualized return for the five years through March 2025.