Fed Rate Cuts Could Save AI Stocks From a Dot-Com Style Crash

The massive spending on artificial intelligence that drove stocks to record highs last year may not need an encore to keep the rally going. According to a report from BCA Research, potential interest rate cuts from the Federal Reserve could be enough to support tech stocks, even if AI infrastructure investment slows down.

This combination of lower rates and persistent inflation could delay or prevent a market crash reminiscent of the Dotcom Bubble.

The AI Spending Boom Nears a Historic Peak

America's largest tech companies—Microsoft, Alphabet, Amazon, Meta, and Oracle—are on track to spend over $500 billion on infrastructure this year, with a significant portion dedicated to AI.

According to Dhaval Joshi, chief strategist at BCA Research, this level of capital expenditure as a percentage of GDP is approaching a threshold that historically marked the peak of major tech investment cycles. Previous cycles include the personal computing boom of the 1980s, the dot-com boom of the 1990s, and the post-pandemic "Zoom boom."

In past cycles, tech stocks typically started to underperform the broader market about a year before capital spending peaked. If history repeats itself, Joshi noted, "AI-plays in the stock market are in imminent danger."

Why This Cycle Could Be Different

Despite historical parallels, the current environment may have more in common with the recent "Zoom boom" than the dot-com crash, primarily due to the Federal Reserve's monetary policy stance.

"Even if the AI capex boom ends, an ultra-accommodative Fed can prolong the stock market rally," Joshi wrote.

This matters because fears of slowing AI spending already caused tech stocks to hesitate in late 2025. The key difference lies in the behavior of real interest rates.

The Critical Role of Real Bond Yields

For stock valuations, what truly matters is not the nominal interest rate but the real bond yield—a bond's return after adjusting for inflation.

Joshi points out that the tech sector held its ground in 2021 because while inflation was rising, real bond yields continued to fall. Tech stocks only began to falter in 2022 when the Federal Reserve’s aggressive rate hikes sent real rates soaring.

Today, the situation is reversed. "Fast forward to today, and rate hikes are not on the Fed's agenda. Quite the contrary, the Fed is signalling more rate cuts," Joshi explained. If inflation remains around 3% while the central bank cuts rates, real yields would decline, providing crucial support for stock valuations.

Market Risks and Broader Outlook

Of course, an "ultra-accommodative" Fed is not guaranteed. Several factors could force policymakers to delay or limit rate cuts, including:

• Persistently sticky or resurgent inflation

• A surprisingly stable job market

• Robust overall economic growth

Following a mixed jobs report on Friday, the probability of the Fed holding rates steady through the first half of the year rose to a one-month high.

While most Wall Street analysts remain optimistic about the stock market's prospects for 2026, the sustainability of the AI rally is a primary concern. Mega-cap tech stocks now represent an unusually large portion of the S&P 500, making the entire index vulnerable to a downturn in the tech sector.

However, lower interest rates could also boost market liquidity, while tax cuts from last year's One Bi Beautiful Bill could stimulate economic growth, potentially offsetting any drag from a slowdown in tech investment.