Analysis- Echoes of the dot-com bubble AI-powered US stock market

WhatsApp Group Join Now
Telegram Group Join Now
Instagram Group Join Now

By Lewis Krauskov

NEW YORK (Reuters) – A U.S. stock rally fueled by excitement over artificial intelligence is drawing comparisons to the dot-com bubble of two decades ago, raising questions about whether prices have yet to recover from optimism over a revolutionary technology. have grown from

AI fever, combined with a resilient economy and strong earnings, has driven the S&P 500 index to a fresh record this year after a more than 50% run from October 2022 lows. The tech-heavy Nasdaq Composite Index is up more than 70 percent since the end of 2022.

While various metrics show stock prices and investor sentiment have yet to hit turn-of-the-century peaks, the similarities are easy to spot. A small group of big tech stocks, including AI chipmaker Nvidia, characterize today's market, recalling the “Four Horsemen” of the late 1990s: Cisco, Dell, Microsoft and Intel.

The run for Nvidia shares, which have gained nearly 4,300 percent in the most recent five-year period, has stirred memories of how network equipment maker Cisco After reaching its peak in 2000, it rose nearly 4,500 percent in the five years. Two stocks.

Valuations have also risen, although many tech champions appear to be in better financial shape than their dot-com counterparts in the late 1990s and early 2000s. Other measures, such as the investor boom, have yet to reach turn-of-the-century highs.

The concern is that the AI-driven boom will end like the dot-com boom — with an epic crash. After nearly quadrupling in just three years, the Nasdaq Composite fell nearly 80 percent from its peak in March 2000 to October 2002. The S&P 500, which doubled over the same period, fell nearly 50 percent over that period.

While several Internet stocks such as Amazon survived and eventually thrived, others never recovered.

“No one knows exactly what will happen with artificial intelligence,” said Sameer Samana, senior global market strategist at the Wells Fargo Investment Institute. noted the same uncertainty about long-term winners.

Echoing the dot-com boom, the information technology sector has grown to 32% of the S&P 500's total market value, according to LSEG Datastream, the largest percentage since 2000 when it rose to about 35%. . Only three companies, Microsoft, Apple and Nvidia, represent more than 20% of the index.

However, tech stocks are now valued at the height of the dot-com bubble, trading at 31 times forward earnings, compared with 48 times in 2000, according to DataStream.

The gap is evident in the prices of Nvidia and Cisco, major providers of products that support Internet infrastructure, whose stocks have yet to retrace their dot-com boom peaks.

While both stocks have risen, Nvidia trades at 40 times forward earnings estimates, while Cisco's reached a level of 131 in March 2000, according to DataStream.

Analysts at Capital Economics also note that the current rally is fueled more by a solid earnings outlook than rising valuations, a sign that fundamentals are more of a driver this time around.

Capital Economics' analysis shows that forward earnings per share in the sectors comprising today's market leaders — tech, communications services and consumer discretionary — will grow faster than the rest of the market through early 2023. In contrast, in the late 1990s and early 2000s sectors' expected earnings grew at a similar pace to the rest of the market, while their values ​​rose faster than 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 levels reached in 1999 and 2000, according to DataStream.

“Our bottom line is that this tech bubble will not burst until the overall market value returns to the level it did in 2000,” Capital Economics analysts said in a note.

Dotcom investors were more than happy with some of the moves. A widely followed American Association of Individual Investors survey found bullish sentiment, often seen as a worrisome sign of high levels, reached 75 percent in January 2000, a few days after the market peak. months ago It recently stood at 44.5%, compared to its historical average of 37.5%.

While an AI bubble is not a foregone conclusion, many investors are wary that metrics could rise further in the coming months if US growth remains steady and tech stocks continue to overcharge.

“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…some real, positive, underlying growth that's behind it and that makes people willing to pay for things. “

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

WhatsApp Group Join Now
Telegram Group Join Now
Instagram Group Join Now

Leave a Comment