Economist Says AI-Fueled Rally Is Reminiscent Of Dot-Com Era: 'Current Environment Is Taking On A Mania Of Sorts'

The stock market came roaring back in the second half of this week, thanks to momentum from Nvidia Corp.’s NVDA artificial intelligence-induced earnings that sent the company’s stock, along with the broader technology sector, higher.

One economist, however, thinks the stock market might be in a price bubble.

What Happened: “We have a price bubble,” said economist David Rosenberg during an interview with CNBC on Thursday, adding that it is similar to the price bubble during the dot-com era of the 1990s.

Looking back on the dot-com bubble and the impact of the internet, the founder of Rosenberg Research said. “We had a real-time shift in productivity and what that meant for the corporate cost curve in general and you had a financial bubble at the same time,” he said.

Referring to the six-month Nasdaq 100 chart, Rosenberg said, “It looks weird, its way overextended.” The economist, however, suggested that the Federal Reserve would likely look at the whole development as positive. The Fed should think of this as a major disinflationary “productivity accelerator” that should help reduce the corporate cost curve, he said.

“So, from a real economic sense, [it] would work toward their anti-inflation objectives,” Rosenberg said.

Rosenberg also weighed in on the AI boom in a Financial Post column on Thursday. “This type of corporate behavior is not too different from what took place in the dotcom bubble, with company after company satisfying investors’ appetite for news on how it plans to incorporate the internet into its business — or boosting stocks just because they added ‘.com’ to the name,” he wrote.

“So, while we are a believer in the long-term benefits of AI, from an investor standpoint, the current environment is taking on a mania of sorts,” he wrote.

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Fed Rate And Impact On Stocks: The Fed continues to signal that rates will likely stay higher for longer, but much of the corporate earnings are tied to zero interest rates. When Rosenberg was asked how this dynamic would affect equities, the economist told CNBC that the impact would vary depending on the sectors.

“I don’t think you can look at the stock market right now as some sort of homogenous entity,” he said, noting that banks, consumer discretionary and transportation sectors are the most interest-rate sensitive sectors. “They have the highest torque to GDP. They are down more than 30% from the cycle highs and they are actually behaving in the exact same pattern they have been going into the past four recessions,” he said.

Rosenberg also noted that the small-cap S&P 600 Index and the Russell 2,000 Index, though faring better this year, are still in fundamental bear markets.

Technology stocks now has a 27% weighting in the S&P 500 Index, the economist said. Technology is a long-duration asset, he added. While conceding that these stocks could also get hit, the economist said, “Those stocks are going to react differently to the economic cycle than pure cyclicals.”

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