The U.S. stock market’s recent surge, fueled by the promise of artificial intelligence, is drawing comparisons to the dot-com bubble of the late 1990s. This has raised concerns about another overvaluation scenario.
What Happened: The current stock market rally, largely attributed to the excitement surrounding AI, has sparked memories of the dot-com bubble, reported Reuters. The S&P 500 index has hit new highs, rising over 50% from its October 2022 low, while the Nasdaq Composite index has seen a 70% increase since the end of 2022.
Despite this, stock valuations and investor enthusiasm have not yet reached the levels seen during the dot-com era. However, the market is currently dominated by a small group of tech giants, with AI chipmaker Nvidia Corp. NVDA leading the pack.
The staggering surge in Nvidia shares, which soared nearly 4,300% over the past five years, has drawn comparisons to the meteoric rise of network equipment maker Cisco Systems Inc CSCO, which saw its stock climb about 4,500% over five years before peaking in 2000, according to a BTIG analysis.
“No one exactly knows what will happen with artificial intelligence,” Sameer Samana, senior global market strategist at the Wells Fargo Investment Institute said, highlighting the similar uncertainty regarding the eventual long-term winners.
While the financial stability of today’s tech champions seems to be stronger than that of their dotcom counterparts, there are still concerns that the AI-driven surge could end in a similar crash. The IT sector has swelled to 32% of the S&P 500’s total market value, the highest percentage since 2000.
Mike O’Rourke, chief market strategist at JonesTrading, thinks the current stock market bull run has a “lot of similarities” with the dot-com era rally. However, there could be still some momentum left, since the S&P 500’s price-to-earnings ratio is still at 21, while it was hovering near 25 between 1999 and 2000, according to Datastream, the report said.
“Our base case is that this tech bubble won’t burst until the valuation of the overall market has reached the sort of level that it did in 2000,” Capital Economics analysts said in a note.
Why It Matters: The current situation in the stock market has been a subject of debate among experts. While some, like economist Harry Dent, have been predicting a major crash, others like veteran analyst Gene Munster believe that the market will continue its bull run for another three to five years before an AI bubble bursts.
Meanwhile, Keith Lerner, Chief Strategist and CIO at Truist, recently downgraded the tech sector from overweight to neutral, citing concerns over its current valuation. This move comes amid the sector’s 11% outperformance of the market last month.
On the other hand, Dan Ives, a Wedbush analyst, has made a bold prediction for the second half of 2024, foreseeing a significant surge in tech stocks, particularly those driven by AI, which will drive tech fundamentals. He attributed this growth to the expanding use cases of AI.
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This story was generated using Benzinga Neuro and edited by Kaustubh Bagalkote
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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