AI Surge Sparks Fears Of Dot-Com-Like Bubble Burst

The soaring investor interest in artificial intelligence has propelled a rally in U.S. stock markets, but it has also fueled concerns about a potential AI-bubble burst akin to the dotcom-bubble eruption of the late 1990s.

The excitement over AI in recent weeks has sent the S&P 500 Index, tracked by the SPDR S&P 500 ETF Trust SPY, to new highs after gaining more than 50% from an October 2022 low. Meanwhile, the Nasdaq Composite Index, which is tracked by the Invesco QQQ Trust QQQ, has soared more than 70% since the end of 2022, Reuters reported.

Nvidia and a handful of other giant tech stocks are driving the current market, much in the same way that the “Four Horsemen” Cisco Systems, Inc. CSO, Dell Technologies Inc. DELL, Microsoft Corporation MSFT and Intel Corporation INTC did nearly three decades ago.

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Nvidia Corp. NVDA has skyrocketed 4,300% over the past five years, resembling network equipment producer Cisco’s 4,500% surge over five years before it peaked in 2000, according to comparison of the two stocks by global financial services firm BTIG, Reuters reported.

There is a lingering fear that the soaring AI sector will burst just as the dot-com industry did after the Nasdaq Composite quadrupled over three years on the back of the dot-com frenzy but then plummeted 80% from a March 2000 high to an October 2002 low. The S&P 500 doubled, but then lost almost 50% within the same period, according to Reuters.

Mimicking the dot-com surge, the information technology sector has swelled to 32% of the S&P 500’s total market value, rivaling a 35% jump in 2000, according to LSEG Datastream.

Today, Microsoft, Apple and Nvidia represent over 20% of the index.

However, tech stocks are more modestly valued now than at the peak of the dot-com bubble, trading at 31 times forward earnings, compared to as high as 48 times in 2000, according to Datastream.

The difference is clear in the valuations of Nvidia and Cisco, a key provider of products supporting internet infrastructure, whose stock has yet to rescale its peaks of the dotcom boom.

While Nvidia and Cisco stocks have soared, Nvidia trades at 40 times forward earnings estimates, compared to Cisco’s 131 level reached in March 2000, according to Datastream.

Price Action: AI stocks and ETFs trended downward for the most part during midday trading on Tuesday.

Nvidia has declined 1.78% to $122.09 while Microsoft has dipped 0.3% to $455.36 and Cisco slipped 1.07% to $47.00 at the time of publication.

Global X Robotics & Artificial Intelligence ETF BOTZ fell 0.20%, ROBO Global Robotics and Automation Index ETF ROBO ticked up 0.26% and iShares Robotics and Artificial Intelligence ETF IRBO gained 0.34%.

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Image created using artificial intelligence via Midjourney.