Innovations from the telegraph to AI often spark intense, short-lived rallies in the companies behind them that don’t topple the wider market but flood pioneers with funding.

A review of 51 major breakthroughs since 1825 shows these bubbles occur in about three-quarters of cases, driving a 45% outperformance on average by enabling faster scaling and real progress.

Today’s AI surge follows that same script: Inflated valuations, but essential capital fueling the next wave of industry change.

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From railroads in the 1800s to AI in 2024, markets have always gone wild over the “next big thing.”

Every few decades, a transformational innovation triggers a surge in investment and speculation, creating what many call a bubble.

The dot-com boom of the late 1990s. The electric vehicle frenzy of 2021. The crypto explosion and implosion. And now, the stampede into artificial intelligence.

Each of these episodes has drawn hand-wringing about irrational exuberance… warnings that investors are being duped or doomed.

But a study of 51 major innovations since 1825, resurfaced recently by Verdad’s Dan Rasmussen, shows that bubbles aren’t merely accidents—they may be necessary.

Economists Cristian Sorescu, Vasiliki Karamanis, and Avanidhar Subrahmanyam combed through two centuries of innovation—from the telegraph to the television to the smartphone.

Their findings, published in a landmark study, offer a fresh perspective on market euphoria.

They found that 73% of major technological breakthroughs led to statistically significant bubbles. But here’s the nuance: The bubbles didn’t usually overwhelm the whole market.

Instead, they appeared at the product level—confined to the small group of companies commercializing the innovation.

These “micro-bubbles” cropped up even during sluggish or recessionary times, like the Great Depression or the inflationary 1970s.

Take the steam engine, for example. Companies directly tied to its development saw massive equity run-ups. But the broader market was flat during that same period.

That tells us the issue is less about whether bubbles exist and more about where they exist, and what they fund.

During these booming phases, capital becomes cheap.

Investors pile in with high expectations, and even if many overpay, the funding helps companies build, scale, and distribute the new technology faster than they otherwise could.

The authors found that firms involved in these innovation-driven bubbles outperformed the market by an average of 45 percentage points during the bubble period.

In other words, those who backed the right companies, even amid hype, were often rewarded.

Of course, not everyone wins. Some investors chase the trend too late or bet on the wrong horse. But overall, the process fuels experimentation and adoption.

Bubbles, as Rasmussen puts it, are the economy’s way of over-allocating resources toward promising frontiers. That behavior fuels revolutions.

Much of today’s anxiety centers around artificial intelligence.

AI-related firms have seen valuations skyrocket. Nvidia (NVDA) is up more than 200% in two years.

Startups with little revenue are getting billion-dollar valuations. And skeptics are drawing parallels to the dot-com bust.

But the historical data shows that these kinds of run-ups are a feature of capitalist innovation.

AI, like past breakthroughs, is attracting a surge of capital because it promises real transformation across multiple industries and the economy at large.

And just like the PC era and the Internet before it, this wave is enabling infrastructure buildouts and use-case experimentation that wouldn’t be possible under tighter capital conditions.

The bubble is the catalyst. The takeaway here isn’t to deny that bubbles exist—it’s to understand the risks and rewards.

Most don’t crash the market. Many don’t even break the companies at their core. And in nearly every case, they fund real progress.

AI may be inflated today… but history suggests that’s how it gets built.

That’s why investors shouldn’t sit out just because parts of the market look expensive.

The smarter move is to dig into what’s being created and find the companies using today’s hype to become tomorrow’s leaders.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research