The surge in U.S. stocks buoyed by hopes for artificial intelligence is drawing comparisons to the dot-com bubble two decades ago, raising questions about whether optimism about revolutionary technology could once again send stock prices soaring.
AI fever, combined with a resilient economy and strong earnings, has propelled the S&P 500 index (.SPX) to a new record this year, up more than 50% from its October 2022 lows. The tech-heavy Nasdaq Composite Index (.IXIC) is up more than 70% since the end of 2022.
By many measures, stock valuations and investor enthusiasm have yet to reach the peaks reached at the turn of the century, but the similarities are easy to spot. A handful of big tech stocks, including AI chipmaker Nvidia (NVDA.O), emblemize today’s market and are reminiscent of the “Four Horsemen” of the late 1990s: Cisco, Dell, Microsoft and Intel.
Nvidia’s shares have risen nearly 4,300 percent over the past five years, reminiscent of network equipment maker Cisco (CSCO.O)’s roughly 4,500 percent surge in the five years to its peak in 2000, according to a BTIG comparison of the two stocks.
Valuations have risen, but many of the tech leaders appear to be in much better financial shape than the dot-com companies of the late 1990s and early 2000s, and other metrics, such as investor bullishness, have yet to reach the peaks of the turn-of-the-century bubble.
The worry is that the AI-driven growth spree will end in a similar way to the dot-com boom: with a crash. After nearly quadrupling in just over three years, the Nasdaq Composite Index fell nearly 80% from its peak in March 2000 by October 2002. The S&P 500, which doubled in a similar period, fell nearly 50% in the same period.
Some internet stocks, such as Amazon (AMZN.O), survived and ultimately thrived, while others never recovered.
“No one knows exactly what’s going to happen with artificial intelligence,” said Samir Samana, senior global market strategist at Wells Fargo Investment Institute, noting similar uncertainty about the ultimate long-term winners.
In response to the dot-com boom, the information technology sector (.SPLRCT) has ballooned to 32% of the S&P 500’s market capitalization, its largest share since nearly 35% in 2000, according to LSEG Datastream. Only three companies — Microsoft (MSFT.O), Apple (AAPL.O) and Nvidia — make up more than 20% of the index.
But tech stocks now trade at more modest price-to-earnings multiples than they did at the peak of the dot-com bubble, trading at 31 times expected earnings compared to 48 times in 2000, according to Datastream.
The difference in valuation between Nvidia and Cisco, two major providers of products that underpin Internet infrastructure, is stark, but Cisco’s stock price has yet to recover from its dot-com boom peak.
Both stocks have soared, but Nvidia trades at 40 times earnings, compared with Cisco’s 131 times earnings in March 2000, according to Datastream.
Analysts at Capital Economics also note that the current stock rally is being driven by robust earnings prospects rather than rising valuations, suggesting fundamentals are the bigger driver this time around.
According to an analysis by Capital Economics, today’s market leaders — sectors including technology, communications services and consumer discretionary — are seeing their expected earnings per share grow at a faster pace than the rest of the market starting in 2023. In contrast, expected earnings in these sectors grew at a similar pace to the rest of the market in the late 1990s and early 2000s, and their valuations rose faster than other stocks.
Looking more broadly, the S&P 500’s price-to-earnings ratio of 21 is well above its historical average but below the roughly 25 it reached in 1999 and 2000, according to Datastream.
“Our base case is that the tech bubble will not burst until market-wide valuations reach 2000-like levels,” analysts at Capital Economics said in a note.
Dot-com investors were far more enthusiastic by some standards: In a widely followed survey by the American Association of Individual Investors, bullish sentiment, often seen as an indicator of fear at higher levels, reached 75% in January 2000, just months before the market peak. More recently, it has been at 44.5%, compared with a historical average of 37.5%.
While an AI bubble is not a foregone conclusion, many investors are wary that if U.S. economic growth remains strong and tech stocks keep soaring, the metrics could worsen further in the coming months.
“There are a lot of similarities,” said Mike O’Rourke, chief market strategist at Jones Trading. “Whenever a bubble occurs, there’s usually some underlying, truly positive, fundamental development that creates the enthusiasm that people are willing to pay whatever the price.”
