Dotcom Bubble vs. Now 🫧

What happened in the markets this week?

📦 Tariff-related customs bond gap hits record US$3.5 billion ( CNBC )

• What happened : U.S. Customs identified 27,479 bond insufficiencies in fiscal 2025 totaling nearly US$3.6 billion, a record level linked to higher tariffs under President Trump’s trade policies. Importers must increase their customs bonds to cover rising duties before their goods can be released.
• How it impacts investors : Higher tariffs are tying up more cash for import-heavy businesses, increasing working capital needs and financial strain. That can pressure margins and create added volatility in sectors exposed to global trade.
• Next steps : Use our Discover page on Simply Wall St to explore sectors most exposed to trade policy shifts, including industrials, retail, and logistics.

💄 Estée Lauder takes Walmart to court over alleged fakes ( CNBC )

• What happened : Estée Lauder sued Walmart in California federal court, alleging counterfeit versions of its beauty brands were sold on Walmart.com by third-party sellers. Walmart said it has zero tolerance for counterfeit goods and will respond in court.
• How it impacts investors : The case highlights the risks that come with large online marketplaces, especially those relying on third-party sellers. It also shows how brand protection can become a legal and reputational issue for both retailers and consumer companies.
• Next steps : Use our Consumer Staples industry overview to compare profitability, brand strength, and risk factors across global beauty and retail stocks.

✈️ Expedia’s B2B growth gives it a boost in Q4 ( WSJ )

• What happened : Expedia Group reported fourth-quarter revenue of US$3.55 billion, up 11% year over year, with business-to-business gross bookings rising 24% compared with 5% growth in consumer bookings. B2B made up 38% of revenue, up from 33% a year earlier, and adjusted earnings per share of US$3.78 beat expectations.
• How it impacts investors : Expedia’s faster-growing B2B arm could help smooth out the ups and downs of consumer travel demand. A bigger enterprise mix may also make it less exposed to competitive and AI-related disruption in online travel.
• Next steps : Check out Expedia’s company report to see how its revenue has tracked over the last few years.

🪙 Coinbase slips into a Q4 loss as crypto prices tumble ( WSJ )

• What happened: Coinbase reported a Q4 net loss of US$667 million, compared with a US$1.3 billion profit a year earlier, as revenue fell 22%. Transaction revenue dropped 37% as crypto prices slid, while subscription revenue came in at US$727 million.
• How it impacts investors: This is a reminder that Coinbase’s earnings still move with crypto prices and trading activity. If digital assets stay weak, revenue could stay under pressure, even with growth in its steadier subscription business.
• Next steps: Take a closer look at Coinbase’s revenue mix and risk profile to see how sensitive it is to crypto market swings.

🚢 Fincantieri sees defense demand powering long-term growth ( WSJ )

• What happened : Fincantieri said it expects sales to roughly double to €18 billion by 2035, driven by rising demand for submarines, warships, and icebreakers. It reported a €60 billion backlog with visibility through 2036 and outlined higher long-term margin targets.

• How it impacts investors : The outlook reflects strong and sustained defense spending amid geopolitical tensions. A large backlog provides revenue visibility, but delivery timelines and government budgets will still matter.

• Next steps : Visit Fincantieri (BIT:FCT) to learn more about the Italian shipbuilder’s business model and financials.

Now let's get into this week's insights!

What can the recent tech rout tell us about the future of the market?

Some are calling it a “bloodbath.” Others warn that a bubble is bursting. The reality is less dramatic… and more nuanced.

Many have pointed to the steep sell-off in software stocks in recent days as evidence that the long-feared AI bubble is about to pop. However, much of the selling has remained confined to the software sector.

The iShares Expanded Tech-Software Sector ETF (IGV) is down almost 20% over the last month while the broader market has not experienced a sell-off.

Now when we zoom out to look at the entire market, it seems to be a different picture that has little resemblance to the bubble that burst in 2000.

The key difference is earnings.

Today’s multiples are largely supported by strong earnings. In contrast, bubbles, like the dotcom implosion, were the result of great expectations without the backing of any fundamental business value. Forward PE ratios surged from 1995 to 2000. Today, however, the forward PE multiple is almost unchanged from where it was in 2020.

💸 The market is rediscovering non-tech sectors

What we’re seeing now is something more complicated than rising multiples. We are instead seeing a shift in market leadership as the long-standing dominance of the tech sector begins to fade. Since October of last year, healthcare and industrial stocks have outperformed the S&P 500, while technology shares have lagged.

This matters because tech had been a near-default winning strategy for years. Since the fourth quarter of 2025, the equal-weight S&P 500 has gained 5%, compared with just 1% for the tech-heavy, market-cap-weighted version. That divergence suggests performance is broadening beyond a handful of mega-cap tech names and that success now depends more on selective positioning.

Tech remains an important driver of growth, but it is no longer a guaranteed path to outperformance. As leadership rotates across sectors, you have an opportunity to reassess asset allocation, doing so offers chances for diversification that both protects capital and captures new sources of upside.

📉 Understanding the “selective selloff”

To understand why the recent selloff has been so selective, you should focus on the growing divergence between U.S. large-cap semiconductor stocks and software companies.

• Semiconductor stocks surge ahead as confidence in software falls

In recent days, large-cap semiconductor stocks have dramatically outperformed software by an unprecedented margin. Over the past 100 trading days, semiconductors have beaten software by roughly 56 percentage points, which is a record spread.

• 💻 Semiconductors are believed to have a future, while software is in question

Investors increasingly view semiconductors as playing a larger and more critical role in the AI revolution than software. The reasoning is straightforward: chips are foundational to the infrastructure required to power AI, while many believe AI itself will eventually replace much of today’s software.

• 💥 Anthropic’s new release triggered the sell-off

Recent developments appear to support that view. Anthropic’s release of Claude Cowork, a simplified version of its advanced AI coding platform, allows users with little to no programming experience to build software solutions. This has fueled concerns about software’s long-term relevance.

As Mizuho Securities technology analyst Jordan Klein observed , “Many buy-siders see no reason to own software, no matter how cheap or beaten down the stocks get.” While semiconductors stocks surged ahead of software stock before this event, that outperformance was likely due to optimism about semis whereas now, that surge seems due to pessimism about software.

• ⚠️ But the software sell-off might be an overreaction

Still, declaring software obsolete may be an overreaction. Wall Street analysts, at least, are not making that call. DataTrek co-founder Nick Colas recently noted in his recent newsletter that the top ten holdings in the iShares Expanded Tech-Software Sector ETF (IGV) are, on average, “significantly more attractive than the S&P 500” when analysts’ price targets are used as a proxy for fair value.

That gap suggests fears surrounding software, and the broader tech sector, may be overdone. If share prices stabilize, the recent selloff in software could ultimately present a selective buying opportunity.

🔥 Why the latest drop may be a bullish sign

For years, markets have quietly feared the eventual bursting of an AI bubble. Investors worried that AI would not be able to fully deliver on its promise to revolutionize productivity.

When Anthropic released industry-specific add-ons to Claude, those concerns appeared to come into focus, but not in the way anyone expected. Claude’s intuitive, low-code capabilities posed a direct threat to established application software leaders such as Autodesk, Workday, and Salesforce.

In response, the S&P 500 application software sub-industry suffered a sharp 30% drawdown.

For a moment, the selloff appeared to be the opening shot in a prolonged downturn that could drag the broader market lower. That scenario, however, has not materialized.

Instead, the market has remained resilient, with losses largely confined to software. Warren Pies of 3 Fourteen Research noted , that until the current software debacle, there has never been an instance where an S&P 500 industry this large, more than 8% of total market capitalization, has sold off so sharply, by over 25%, while the broader market remains within 3% of all-time highs.

In effect, the market has isolated the area under pressure without infecting the broader index. Even as a major tech sub-sector suffers a deep drawdown, the S&P 500 continues to push forward.

💰 AI spending continues, uninterrupted

Another source of recent market turbulence is the surge in spending on artificial intelligence. Alphabet provides the clearest example. Just days ago, the company announced plans to invest between $175 billion and $185 billion in capital expenditures in 2026, nearly double last year’s $91 billion.

That increase implies an additional $84–$94 billion that must generate meaningful returns in the years ahead. While the scale may not seem extraordinary for a company of Alphabet’s size, its projected 2026 CapEx would exceed last year’s operating cash flow. In effect, Alphabet, and its peers, are committing enormous resources to a technology that, despite its promise, has yet to fully prove its economic payoff.

As J.P. Morgan’s Michael Cembalest has explained , tech capital spending as a share of GDP is almost equal to the combined investment in the public works projects of the 1930s, the Manhattan Project, the postwar electricity buildout, the Apollo program, and the interstate highway system.

Alphabet is not alone in its aggressive spending ambitions. At the start of the year, Meta’s combined capital expenditures and R&D reached a record 70% of revenue, as the company pledged to “aggressively ramp up spending to stay competitive in the AI arms race.”

Importantly, much of this investment by AI hyperscalers is being funded through internally generated cash flow. This stands in sharp contrast to the late-1990s tech boom, when heavy borrowing financed spending and ultimately contributed to the NASDAQ’s roughly 80% collapse.

That distinction helps explain why today’s equity market differs fundamentally from the 1990s. Much of the market’s strength is being driven by solid earnings growth, not by speculative expectations detached from underlying fundamentals.

🚨 What should you consider when allocating today?

While the recent pullback appears to be a brief pause in an otherwise upward trend, some are using it as an opportunity to think more strategically about portfolio allocation. Rather than remaining heavily concentrated in tech, they are broadening their exposure, and recent market performance suggests that approach is paying off.

Research from Goldman Sachs shows that the top five stocks in the S&P 500 now trade at only a “moderate premium” to the remaining 495. At the same time, market leadership is expanding beyond the U.S. In dollar terms, Europe, China, and Asia have collectively generated nearly double the total returns of the U.S., with standout gains from Italy (54%), Spain (73%), and South Korea (71%).

This broadening is also evident within the S&P 500 itself. Data from Ritholtz Wealth Management shows that 27% of materials companies and 23% of energy companies fall into the top decile of year-to-date returns, further evidence that strong performance is no longer confined to technology.

A healthier, more diversified market is good news, but it also makes stock selection more challenging. With winners emerging across sectors, where should you look?

One potential signal comes from insider buying. Data from Simply Wall St highlights stocks with elevated insider purchases over the past three months, often a sign of confidence from company leadership. Supporting this view, a Wall Street Journal analysis of roughly 1,400 insider purchases at S&P 500 companies over the past five years found that shares rose a median 2% in the month following insider buying. Notably, most of those purchases occurred after recent price declines driven by weak earnings or negative headlines.

The recent pullback may also present selective “buy-the-dip” opportunities. While Anthropic’s latest release showcases impressive coding capabilities, it remains far from displacing entrenched, multi-decade software incumbents, suggesting that recent weakness in parts of the sector may be more cyclical than structural.

The recent drop also presents a valuable opportunity for you to buy the dip. While the coding power of Anthropic’s latest release is impressive, it has a long way to go before it unseats the multi-decade incumbents in software.

💡 The Insight: The sky isn’t falling, but the weather is changing

The recent dip tells us that the market isn’t crashing, it’s changing. AI has changed the way the market perceives value. Right now, the market thinks software has an uncertain future but those with a long-view might consider this an opportunity to pick up some strong software companies at a discount.

🧐 In this new setting, here are a few strategies to consider:

• As AI continues to disrupt entire industries, you may want to broaden their allocation to sectors that face no threat from the technology. These are companies that will not see a decrease in demand even as AI and LLMs become more sophisticated. Examples include:

  • Industrial
  • Materials
  • Energy

• Examine companies that have been unfairly punished in the recent rout. Many software players are legacy systems at companies that don’t have an interest in paying the switching costs associated with trying to code their way into an alternative. Remember, a home-grown software solution means that the when something goes wrong, the company doesn’t have the support of a service provider with decades of experience. Examples include:

  • Microsoft (MSFT)
  • Adobe (ADBE)
  • CrowdStrike (CRWD)
  • Intuit (INTU)

• The performance of the stock market is no longer confined to tech. If you want to gain more exposure to the part of the market that isn’t the Mag7 you can.You can opt for an ETF that consists of just the other 493 stocks. This approach allows you to add more weight to the names that could benefit from a broader market rise.

Key Events Next Week

Monday

• Markets in the U.S. and Canada will be closed for Presidents/Family Day.
• Markets across China will have some days of the week closed in celebration of Lunar New Year – each exchange has their own schedule.

Tuesday

• 🇬🇧 UK Unemployment Rate (Dec)
  • 📊 Forecast: 5.1% , Previous: 5.1%
  • ➡️ Why it matters: A steady unemployment rate suggests the labour market is stabilising. But if joblessness starts rising, it would strengthen the case for Bank of England rate cuts and could support rate-sensitive stocks.

Wednesday

• 🇨🇦 Canada Inflation Rate YoY (Jan)
  • 📉 Forecast: 2.5%, Previous: 2.4%
  • ➡️ Why it matters: Inflation drifting higher could delay rate cuts from the Bank of Canada. A softer reading would give policymakers more room to ease and support equities.
• 🇬🇧 UK Inflation Rate YoY (Jan)
  • 📉 Forecast: 3.0%, Previous: 3.4%
  • ➡️ Why it matters: Inflation remains above target in the UK. A meaningful slowdown would ease pressure on the BoE, while stubborn inflation keeps rates higher for longer.

Friday, February 20

• 🇯🇵 Japan Inflation Rate YoY (Jan)
  • 📈 Forecast: 1.9%, Previous: 2.1%
  • ➡️ Why it matters: Japan’s inflation trend influences expectations for Bank of Japan policy shifts. Sticky inflation increases the chance of policy tightening, which can impact global bond markets.

Earnings season continues with the following companies set to report next week:

• Alibaba Group (BABA)
• Booking Holdings (BKNG)
• Carvana (CVNA)
• Walmart (WMT)
• Warner Bros Discovery (WBD)
• Airbus (AIR)

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

Simply Wall St analyst Stella and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.