The S&P 500 (SNPINDEX:^GSPC) and the Nasdaq Composite (NASDAQINDEX:^IXIC) have advanced 13% and 14%, respectively, year to date. The driving force behind those double-digit gains has been strong earnings growth, particularly among technology companies involved in the artificial intelligence infrastructure build-out.
However, by one valuation measure, the stock market is repeating a pattern last seen during the dot-com bubble. Is the AI boom destined to end in a catastrophic market crash? Of course, no one can predict the future, but here’s what investors should know.
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The stock market is repeating a pattern last seen during the dot-com bubble
The S&P 500 recorded a cyclically adjusted price-to-earnings (CAPE) ratio of 41.1 in August. The index’s CAPE ratio has now exceeded 40 in five consecutive months, something that has only happened once before: during the dot-com bubble in 2000.
The dot-com bubble peaked in March 2000. Irrational enthusiasm had pushed valuations on many speculative internet companies to unsustainable levels. Initially, the downturn was concentrated in the technology sector, but the losses eventually spread across all sectors as the economy slipped into a recession.
After peaking in March 2000, the S&P 500 had fallen 49% by October 2002, and it took the index seven years to recover its losses. It did not reach a new high until May 2007. Meanwhile, the Nasdaq Composite had fallen 78% by October 2002, and it took the index 15 years to recoup its losses. It did not reach a new high until April 2015.
Why the AI boom is not a repeat of the dot-com bubble
There are a few important differences between the dot-com bubble and the artificial intelligence boom. First, the internet became publicly available in the early 1990s, but it took over a decade to reach mainstream adoption. Generative AI became publicly available with ChatGPT in late 2022, and it has already reached mainstream adoption.
In fact, JPMorgan Chase strategist Justin Biemann says artificial intelligence is “one of the fastest-adopted technologies in history, with nearly one in four American firms deploying it at scale.” Also, Stanford University reports that consumer adoption of generative AI reached 50% within three years, while it took the internet twice as long to reach the same level.
