The tech-stock boom has eclipsed the dot-com bubble - and a brutal sell-off is looming, Bill Smead says

• The AI-fueled mania around tech stocks is more extreme than the dot-com bubble, Bill Smead says.
• The fund manager says the passive-investing boom has lifted Big Tech stocks to dangerous highs.

The AI-fueled frenzy around technology stocks has eclipsed the internet mania of the late 1990s and early 2000s, setting the stage for a prolonged and painful sell-off, Bill Smead has warned.

"This financial euphoria episode has gone to a sustained high that makes the dot-com bubble look like small change," the Smead Capital Management founder and CEO said in a Tuesday missive titled "Passively Dangerous Bubble."

Smead argued that passive-investment giants like BlackRock and Vanguard have "attempted to mask this crazy euphoria" by shifting Big Tech stocks into different categories. For example, classifying Meta and Alphabet as communication-services companies and assigning Amazon to the discretionary sector.

But if the likes of Amazon, Netflix, and Tesla are included within information technology, that sector now makes up an unprecedented 41.5% of the total market value of the S&P 500, Smead noted.

The veteran fund manager cautioned that level of concentration tends to end badly. "Manias die in vicious ways," he said.

Smead pointed to electronics giant RCA suffering a 90% drop in its stock price between 1929 and 1930. He also highlighted that Disney's earnings multiple collapsed by a similar percentage between 1972 and 1982, while AOL has been "brushed into the dustbin of history" since the dot-com bubble burst.

The Buffett-style value investor said that one of his key goals is to "avoid permanent damage which comes from being caught in financial euphoria." Therefore, his team is eschewing sectors they view as "most vulnerable to large multi-year price declines."

Smead also complained that lawmakers and regulators have failed to rein in anti-competitive business practices, enabling the likes of Microsoft, Alphabet, and Meta to grow so large and remain so dominant.

The dearth of government crackdowns means it's "up to the next 10 years of on-again, off-again bear markets to cure the stock market this time," he said.

Other investors have issued similar cautions in the past. For example, Michael Burry of "The Big Short" fame has sounded the alarm on index funds, overpriced tech stocks, and mass speculation in recent years. He also purchased bearish put options on S&P 500 and Nasdaq-100 exchange-traded funds with a notional value of $1.6 billion last quarter, signaling he's wary of a stock-market crash.

Smead signed his missive with a final warning: "Fear stock market failure."