Evaluation-Echoes of dotcom bubble haunt AI-driven US stock market

By Lewis Krauskopf

NEW YORK (Reuters) – A U.S. stock rally supercharged by excitement over artificial intelligence is drawing comparisons with the dotcom bubble twenty years ago, raising the query of whether prices have again been inflated by optimism over a revolutionary technology.

AI fever, coupled with a resilient economy and stronger earnings, has lifted the S&P 500 index to fresh records this yr following a run of greater than 50% from its October 2022 low. The tech-heavy Nasdaq Composite index has gained over 70% for the reason that end of 2022.

While various metrics show stock valuations and investor exuberance have yet to hit peaks reached on the turn of the century, the similarities are easy to identify. A small group of massive tech stocks including AI chipmaker Nvidia symbolize today’s market, recalling the “4 Horsemen” of the late Nineties: Cisco, Dell, Microsoft and Intel.

The dizzying run in shares of Nvidia, which gained nearly 4,300% in a recent five-year period, stirred memories of how network equipment maker Cisco surged about 4,500% over five years leading as much as its peak in 2000, in accordance with a BTIG comparison of the 2 stocks.

Valuations have grown as well, though many tech champions look like in much better financial shape than their dot-com counterparts of the late Nineties and early 2000s. Other measures, similar to investor bullishness, have yet to succeed in the frothy heights of the turn of the century.

The priority is that the AI-driven surge will end the identical way because the dot-com boom – with an epic crash. After nearly quadrupling in only over three years, the Nasdaq Composite plunged almost 80% from its March 2000 peak to October 2002. The S&P 500, which doubled in an identical timeframe, collapsed nearly 50% in that period.

While several web stocks similar to Amazon survived and eventually thrived, others never recovered.

“Nobody exactly knows what’s going to occur with artificial intelligence,” said Sameer Samana, senior global market strategist on the Wells Fargo Investment Institute, noting the identical uncertainty concerning the eventual long-term winners.

Echoing the dot-com boom, the data technology sector has swelled to 32% of the S&P 500’s total market value, the most important percentage since 2000 when it rose to almost 35%, in accordance with LSEG Datastream. Just three firms, Microsoft, Apple and Nvidia, represent over 20% of the index.

Nonetheless, tech stocks are more modestly valued now than at the height of the dot-com bubble, trading at 31 times forward earnings, in comparison with as high as 48 times in 2000, in accordance with Datastream.

The difference is obvious within the valuations of Nvidia and Cisco, a key provider of products supporting web infrastructure, whose stock has yet to rescale its peaks of the dotcom boom.

While each stocks have soared, Nvidia trades at 40 times forward earnings estimates, in comparison with Cisco’s 131 level reached in March 2000, in accordance with Datastream.

Capital Economics analysts also note that the present rally is being fueled more by solid earnings outlooks relatively than growing valuations, an indication that fundamentals are more of a driver this time.

Forward earnings per share in sectors containing today’s market leaders – tech, communication services and consumer discretionary – have been growing faster since early 2023 than the remaining of the market, a Capital Economics evaluation showed. In contrast, expected earnings within the sectors grew at an identical pace to the remaining of the market within the late Nineties and early 2000s, while their valuations soared faster than for other stocks.

More broadly, the S&P 500’s price-to-earnings ratio of 21 is well above its historical average but below the roughly 25 level reached in 1999 and 2000, in accordance with Datastream.

“Our base case is that this tech bubble won’t burst until the valuation of the general market has reached the kind of level that it did in 2000,” Capital Economics analysts said in a note.

Dotcom investors were rather more euphoric by some measures. Bullish sentiment within the widely followed American Association of Individual Investors survey, often seen as a worrisome indicator at high levels, reached 75% in January 2000, just months before the market peaked. It recently stood at 44.5%, in comparison with its historical average of 37.5%.

While an AI bubble will not be a foregone conclusion, many investors are wary that metrics could grow to be much more stretched in coming months if U.S. growth stays robust and tech stocks proceed charging higher.

“There are a whole lot of similarities,” said Mike O’Rourke, chief market strategist at JonesTrading. “When you might have a bubble, normally it’s rooted in … some true, positive, fundamental development that’s behind it and that creates that enthusiasm for people to pay any price for things.”

(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and Richard Chang)

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