By Ben Levisohn

President Donald Trump's policies are helping inflate the tech bubble. The Federal Reserve will get it all the way there.

We spend most of our time worrying about the negative impact of Trump's policies: How tariffs will drive up costs and hit corporate margins. How the immigration crackdown will create worker shortages and drive up wages. How the defunding of some universities could damage scientific research. Less time is spent looking for beneficiaries, but one area stands out -- technology companies.

Big Tech wouldn't seem to need any more help, but it's getting it anyway. It's there in the president's relaxation of chip exports to China and in the Big Beautiful Bill's treatment of research and development. And it was on display this past week in Pittsburgh, where Trump appeared at the Pennsylvania Energy and Innovation Summit to tout the $92 billion in investments that companies like Google and Blackstone pledged to make in data infrastructure to boost artificial intelligence. The Technology Select Sector SPDR exchange-traded fund has gained 35% over the past three months, trouncing the S&P 500's 19% rise.

Tech's strength has people talking about bubbles once again -- and not without evidence. The top 10 companies in the S&P 500 trade for close to 30 times 12-month forward earnings, notes Torsten Sløk, chief economist at Apollo Global Management, above the 25 times the top 10 fetched during the dot-com bubble. "The difference between the IT bubble in the 1990s and the AI bubble today is that the top 10 companies in the S&P 500 today are more overvalued than they were in the 1990s," he writes.

But it may be too soon to call the stock market a bubble. UBS strategist Andrew Garthwaite has a seven-point bubble checklist, one that includes everything from a "This time is different" attitude -- check -- a generation since the last bubble -- check -- and stocks outperforming bonds by more than 5% a year over a 10-year period -- check. Retail trading -- "rocket fuel as retail tends to follow momentum and be far less 'valuation' focused" -- is No. 6 on Garthwaite's checklist and was only recently ticked off, with speculation rising not just in the U.S. but Korea and India as well. "The only precondition missing is benign monetary conditions, but this is likely to happen by year end," he writes.

Garthwaite notes that UBS's economists expect the Fed to start cutting rates at the September meeting, and to have shaved a full percentage point off by the end of the year, though the market is reflecting just a 1% chance of the target hitting 3.25%-3.50% by that point. It's clear that even the members of the Fed itself can't agree on when rate cuts should begin. Governor Christopher Waller, for one, argues that cuts should start as early as the Fed's next meeting, which begins on July 29, though Chair Jerome Powell continues to be in wait-and-see mode despite pressure from Trump.

The most likely outcome is for the Fed to stand pat later this month, given the remaining uncertainty over tariffs, but with recent inflation data looking benign, it may not be able to wait much longer. "They'll stay on hold for now, but they won't be able to justify it for much longer," writes Nigel Green of deVere Group.

But it's Trump's policies that are making this bubble possible. Consider the tax-and-spend bill that was just approved by Congress, which included cuts to Medicaid, an extension of the 2017 tax cuts, and other measures. HSBC strategist Alastair Pinder notes that the bill itself will probably boost economic growth by just 0.4% over 10 years per an analysis from the congressional Joint Committee on Taxation.

The bill also allows companies to expense all of their domestic R&D costs in the year they do the spending rather than amortizing it over a five-year period. That means companies get all of the tax benefit at one time, lowering their taxable income and improving cash flow, Pinder says -- and they also get to apply the new rule to spending from 2022 to 2024.

And who does most of that spending? The Magnificent Seven stocks, which account for 47% of R&D by S&P 500 companies. "For them, the windfall should be somewhat immediate and provide more cash to reinvest in growth, or return to shareholders," Pinder writes.

Even tariffs, in an odd way, have helped Big Tech. Pinder notes that a weaker dollar, spurred by Trump's trade policies, would lift earnings for companies that do business overseas. For S&P 500 companies, 30% of revenue comes from overseas, and that figure jumps to about 55% for the tech sector. That should result in a two-percentage-point lift to the S&P 500 in the second quarter, providing even more impetus for upside.

And there's still more to come. Raymond James strategist Ed Mills notes that the Trump administration is set to release its AI Action Plan on July 23, which will attempt to align U.S. policy behind the goal of dominating artificial intelligence globally. The plan would likely make it easier to build data centers and other AI infrastructure by easing the permitting process, expand government research, and train workers to do tasks that are currently not done in the U.S.

Beneficiaries would include AI and software companies like Microsoft, Alphabet, Amazon.com, Meta Platforms, Nvidia, ServiceNow, Salesforce, and Atlassian; cybersecurity firms including CrowdStrike Holdings, Palo Alto Networks, and SentinelOne; and chip makers and other advanced manufacturing companies like Intel, Applied Materials, and Lam Research.

It can be possible to have too much of a good thing. There's no better example than Cisco Systems, which is having a stellar year after hitching a ride on the AI train. Artificial-intelligence networking orders have been growing quickly, and Evercore ISI analyst Amit Daryanani expects the company to generate $1 billion in AI revenue by fiscal 2027. The stock has gained 42% over the past 12 months.

Yet despite that run-up, Cisco has still not recovered from the dot-com boom, when it became the poster child for internet investor excesses. The stock is down 15% from its March 2000 peak. And while it's possible shares get back to those heights before the end of the current calendar year, 25 years is a long time to wait for a stock to recover -- bubble or no bubble.

Write to Ben Levisohn at Ben.Levisohn@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

July 18, 2025 11:21 ET (15:21 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.