NEW YORK – A surge in U.S. stock prices driven by excitement over artificial intelligence is drawing comparisons to the dotcom bubble of the late 1990s, sparking concerns that the market may be overinflated by enthusiasm for revolutionary technology.
The rise of AI, combined with a resilient economy and stronger corporate earnings, has pushed the S&P 500 index to new highs this year, following a more than 50% climb from its October 2022 low. The tech-heavy Nasdaq Composite has soared over 70% since the end of 2022.
While metrics show that stock valuations and investor exuberance have not yet reached the peaks of the dotcom era, the similarities are striking. A small group of massive tech stocks, including AI chipmaker Nvidia, have come to symbolize today’s market, recalling the “Four Horsemen” of the late 1990s: Cisco, Dell, Microsoft, and Intel.
Nvidia’s meteoric rise, gaining nearly 4,300% over a recent five-year period, brings to mind network equipment maker Cisco’s 4,500% surge leading up to its peak in 2000. Valuations have also increased, though many of today’s tech giants are in far better financial shape than their dotcom predecessors.
However, some fear that the AI-driven rally may end similarly to the dotcom boom—with a dramatic crash. After nearly quadrupling in just over three years, the Nasdaq Composite plunged almost 80% from its March 2000 peak to October 2002. The S&P 500, which doubled over a similar period, collapsed nearly 50%.
“No one exactly knows what will happen with artificial intelligence,” said Sameer Samana, senior global market strategist at the Wells Fargo Investment Institute, noting the uncertainty about which companies will emerge as long-term winners.
The information technology sector now accounts for 32% of the S&P 500’s total market value, the largest share since 2000, when it peaked at nearly 35%. Microsoft, Apple, and Nvidia alone represent over 20% of the index.
Despite the tech sector’s dominance, current valuations are more moderate than during the dotcom bubble. Tech stocks trade at 31 times forward earnings, compared to 48 times in 2000. Nvidia trades at 40 times forward earnings estimates, whereas Cisco traded at 131 times in March 2000.
Analysts at Capital Economics note that the current rally is driven more by solid earnings outlooks rather than just rising valuations. Forward earnings per share in sectors including tech, communication services, and consumer discretionary have been growing faster since early 2023 than the rest of the market.
The S&P 500’s price-to-earnings ratio of 21 is above its historical average but below the 25 level reached in 1999 and 2000. Capital Economics analysts suggest that this tech bubble won’t burst until the overall market’s valuation reaches the levels seen in 2000.
Investor sentiment also shows a more cautious approach compared to the dotcom era. Bullish sentiment in the American Association of Individual Investors survey recently stood at 44.5%, well below the 75% reached in January 2000, just before the market peaked.
While an AI bubble is not inevitable, many investors remain wary that market metrics could become even more stretched if U.S. economic growth continues and tech stocks keep rising.
“There are a lot of similarities,” said Mike O’Rourke, chief market strategist at JonesTrading. “When you have a bubble, usually it’s rooted in some true, positive, fundamental development that creates enthusiasm for people to pay any price for things.”
