AI-driven stock surge sparks dotcom bubble fears

The surge in US stock prices, driven by enthusiasm for AI, draws comparisons to the dot-com bubble two decades ago, sparking concerns over inflated valuations. The S&P 500 has reached new records, climbing more than 50% from its October 2022 low, while the Nasdaq Composite has surged over 70% since the end of 2022. A few massive tech stocks, including Nvidia, are leading this rally, reminiscent of the ‘Four Horsemen’ tech stocks of the late 1990s.

Despite the impressive gains, some analysts caution that today’s tech stocks are more financially robust than their dotcom-era counterparts. However, fears persist that the AI-driven surge might end in a crash similar to the dotcom bust, which saw the Nasdaq Composite plummet nearly 80% from its March 2000 peak, and while some companies like Amazon thrived post-bubble, many did not recover.

Current tech stock valuations, while high, are more grounded in solid earnings prospects rather than speculative growth, a key difference from the dot-com era. For instance, Nvidia trades at 40 times forward earnings estimates, far lower than Cisco’s 131 times in 2000. Although the S&P 500’s price-to-earnings ratio of 21 is above its historical average, it remains below the peak levels of the late 1990s. Nonetheless, investors remain cautious, wary of metrics becoming overly stretched if economic growth continues and tech stocks keep climbing.