I was there for the dotcom bust. Here’s why the AI ​​boom isn’t the same.

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The boom in AI stocks has some obvious parallels with the dot-com bubble that drove the stock market to outrageous highs in 1999 and 2000.

According to a recent Survey from Bank of America40% of fund managers think AI stocks are in a bubble (45% say no and 15% don’t know).

But as someone for whom the dot-com bubble was current events rather than history, I can tell you that today’s market is nowhere near what the dot-com bubble market was.

How can I say such a thing?

That’s because the world of investing has changed fundamentally from what it was in the days of the dot-com bubble.

At the time, besotted people (I wouldn’t call them investors) paid whatever the market was asking for ridiculously priced stocks like Pets.com, Boo.com, and Webvan, which ultimately drove the shares up. The finders were left with nothing.

Why were people loading up with individual stocks? The fear of missing out on the internet wave certainly had people piling money on the table as they looked to stretch their money further. But the main reason was that in 2000, people didn’t invest the way they do now, because there weren’t as many broad-based index funds as there are today.

So those who bought into the dot-com hype — and there were a lot of them — mostly bought individual stocks.

These days, people talk — wrongly, in my opinion — about the S&P 500 (^GSPC) being in a bubble, given the concentration of a handful of stocks that power the index. At the time, the Nasdaq market was hot stuff. And boy, did that bubble burst.

Leading online pet retailer Pets.com announced on November 7, 2000 that it was laying off more than 250 of its 320 employees due to the company’s inability to find a buyer or financier. doing. (newsmaker) (Getty Images via Getty Images)

On January 10, 2000, one of the most tumultuous events took place. That’s when Gerald Levin had Time Warner, the media and entertainment company he ran, make one of the dumbest deals in history: selling itself to America Online, a dot-com megabubble, in exchange for AOL stock.

(You may have read about the deal recently because Levin died last week and many obituaries mentioned his AOL debacle.)

Two months after the Time Warner-AOL deal was announced — on March 10, 2000 — the Nasdaq, which had more than doubled from a year earlier, hit a final peak of 5,048.62.

Then the slide began. And kept going. And going. And going.

Finally, the Nasdaq bottomed at 1,114.11 on October 9, 2002. That was down 78 percent from its peak. It did not score another new high until April 23, 2015 – 15 years after the previous peak.

Even one of the high-quality companies that survived the bubble – Cisco Systems – is not a great investment. It was recently trading about 30% below what it achieved at peak bubble days.

Barring a completely unexpected catastrophe, can you see the S&P losing 78% of its value two and a half years from now? I sure can’t see that happening. Especially given the trillions of dollars currently missing from S&P index funds, from employers and employees participating in defined benefit plans and from institutional investors such as pension funds for which the S&P is a benchmark.

But, you say, what about the amazing seven tech companies whose stocks doubled last year and drove the S&P to new high after new high?

The S&P’s total return—price appreciation plus reinvested profits—was 26.3% for the year. Doesn’t that mean we’re in a bubble?

I don’t think so. One of the reasons is that even though the seven were incredibly hot, the other S&P companies — let’s call them the Non-Magnificent 493 — had a total return of 9.9%, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. This is about the average return that the US market has shown over a long period of time.

A Pets.com sock puppet dog stars in a commercial for the company on January 11, 2000 in Los Angeles. (Bob Reha/Liaison/Getty Images) (Bob Reha Jr. via Getty Images)

Amazingly, this year’s market, despite the recent decline, is on track to surpass last year’s market. According to Silverblatt, the S&P had returned 7.28% through Friday’s close. Extrapolate the 2.5 month return over a full year and you get 34.9%.

And now, some of last year’s Magnificent Seven have a less magnificent 2024. Tesla ( TSLA ) was down 34.2% as of Friday’s close — the worst performer in the S&P, according to Silverblatt.

Nvidia ( NVDA ) accounted for 32% of the S&P’s gains this year, they say, with Microsoft ( MSFT ), Meta ( META ), and Amazon ( AMZN ) accounting for another 28%. Apple ( AAPL ), however, is down for the year, and Alphabet ( GOOG , GOOGL ) has made only modest gains. (So ​​maybe we should rename the Magnificent Seven the Fab Four?)

The point here is that when three of the Magnificent Seven are not doing well and yet the S&P continues to move.

Look, I’m not telling you that the market these days is any kind of bargain—it’s not cheap by any standard. And I’m not telling you that it’s not going to fall, possibly quickly, in the medium to long term.

But what I’m telling you is that there’s a big difference between an overvalued market like today’s and an overvalued market like the Nasdaq in the days of the dot-com bubble.

Investors may have some tough times ahead. But a decline of nearly 80 percent over the next two and a half years? As we say in the part of the world I live in: fuhgeddaboudit.

Alan Sloan is an award-winning journalist and contributor to Yahoo Finance.

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