A surge in U.S. stocks driven by enthusiasm for artificial intelligence is drawing comparisons to the dotcom bubble two decades ago. The S&P 500 index (.SPX) has hit new records, climbing over 50% from its October 2022 low, while the Nasdaq Composite index (.IXIC) has risen more than 70% since the end of 2022. The meteoric rise of AI-related stocks, particularly Nvidia (NVDA.O), which has gained nearly 4,300% over five years, evokes memories of the late 1990s when tech giants like Cisco saw similar surges. Despite the exuberance, today’s tech firms are in better financial shape, and investor sentiment has not yet reached the frothy levels of the early 2000s.
Concerns linger that the AI-driven rally could end like the dotcom boom, which saw the Nasdaq Composite plunge nearly 80% from its 2000 peak. However, current valuations are more moderate, with tech stocks trading at 31 times forward earnings compared to 48 times in 2000. Nvidia’s valuation at 40 times forward earnings is far below Cisco’s peak of 131 in 2000. Analysts at Capital Economics suggest the current rally is driven by solid earnings prospects rather than inflated valuations, with the S&P 500’s price-to-earnings ratio at 21, lower than the 25 level seen in 1999 and 2000. While today’s market is buoyed by strong fundamentals, some worry that the tech bubble might still burst if overall market valuations reach the extreme levels of 2000.