By Lewis Krauskopf
NEW YORK (Reuters) – A rally in the U.S. stock market fueled by enthusiasm for artificial intelligence is drawing comparisons to the dot-com bubble of two decades ago, raising questions about whether prices have once again been driven higher by optimism about a revolutionary technology.
AI fever, combined with a resilient economy and stronger profits, has lifted the S&P 500 to new records this year after a run of more than 50% from the October 2022 low. The tech-heavy Nasdaq Composite index has risen more than 70% since the end of 2022.
While various metrics show that stock valuations and investor enthusiasm have yet to reach the peaks they did at the turn of the century, the similarities are easy to spot. A small group of giant tech stocks, including AI chipmaker Nvidia, symbolizes today’s market, reminiscent of the “Four Horsemen” of the late 1990s: Cisco, Dell, Microsoft and Intel.
The dizzying rise in Nvidia shares, which have surged nearly 4,300% over the past five years, was reminiscent of networking equipment maker Cisco’s roughly 4,500% rise in the five years leading up to its peak in 2000, according to a comparison of the two stocks by BTIG.
Valuations have also risen, though many tech champions appear to be in much better financial shape than their dot-com counterparts of the late 1990s and early 2000s. Other metrics, such as investor optimism, have yet to reach the frothy heights of the turn of the century.
The worry is that the AI-driven boom will end the same way the dotcom boom did — with an epic crash. After nearly quadrupling in just over three years, the Nasdaq Composite fell nearly 80% from its peak in March 2000 through October 2002. The S&P 500, which doubled in a similar time frame, plummeted nearly 50% during that period.
While several Internet companies, such as Amazon, survived and eventually thrived, others never recovered.
“Nobody knows exactly what’s going to happen with artificial intelligence,” said Sameer Samana, senior global market strategist at the Wells Fargo Investment Institute, pointing to similar uncertainty about the ultimate long-term winners.
Following the dotcom boom, the information technology sector has grown to 32% of the S&P 500’s total market value, the largest share since 2000 when it rose to nearly 35%, according to LSEG Datastream. Just three companies, Microsoft, Apple and Nvidia, account for more than 20% of the index.
However, according to Datastream, technology stocks are now more modestly valued than they were at the height of the dotcom bubble. They trade at 31 times forward earnings, compared to as much as 48 times in 2000.
The difference is clearly visible in the valuations of Nvidia and Cisco, a major supplier of products that support Internet infrastructure, whose stock price has yet to reach the peaks of the dotcom boom.
While both stocks have risen sharply, Nvidia is trading at 40 times expected earnings, compared with the 131 level Cisco hit in March 2000, according to Datastream.
Analysts at Capital Economics also note that the current rally is being fueled more by solid earnings expectations than by rising valuations, a sign that fundamentals are more the driving force this time around.
Expected earnings per share in sectors with the current market leaders – technology, communications services and consumer goods – have been growing faster than the rest of the market since the start of 2023, an analysis by Capital Economics has found. By contrast, expected earnings in sectors in the late 1990s and early 2000s grew at a similar pace to the rest of the market, while their valuations rose faster than those of other stocks.
According to Datastream, the S&P 500’s price-to-earnings ratio of 21 is well above its historical average, but below the level of about 25 reached in 1999 and 2000.
“We believe this technology bubble will not burst until the valuation of the overall market reaches 2000 levels,” analysts at Capital Economics said in a note.
Dotcom investors were, by some measures, far more euphoric. Bullish sentiment in the widely followed American Association of Individual Investors survey, often seen as a worrying indicator at elevated levels, reached 75 percent in January 2000, just months before the market peaked. It recently stood at 44.5 percent, compared with the historical average of 37.5 percent.
While an AI bubble is not yet predictable, many investors fear the numbers could rise further in the coming months if US growth remains robust and tech stocks continue to rise.
“There are a lot of similarities,” said Mike O’Rourke, chief market strategist at JonesTrading. “When you have a bubble, it’s usually rooted in … a real, positive, fundamental development behind it that creates the excitement that people will pay whatever price they want for things.”
(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and Richard Chang)
