2024 AI Fueled Stock Market Bubble vs 1999 Internet Mania?

By the Curmudgeon

It’s the AI way or the Highway:

The run in Artificial Intelligence (AI) stocks this year has many analysts making comparisons to the 1999 “Dot.com” bubble.  AI poster child Nvidia’s (NVDA) market cap is about $2.2 trillion. Nvidia currently enjoys 75% gross profit margins and has an estimated 80% share of the Graphic Processing Unit (GPU) market. 

Voracious demand has outpaced production and spurred competitors to develop rival chips. The ability to secure GPUs governs how quickly companies can develop new artificial-intelligence systems. Tech CEOs are under pressure to invest in AI, or risk investors thinking their company is falling behind the competition.  Tech stocks are punished if they can’t produce any AI infused products that are in demand.

That’s exactly what happened to Apple (AAPL) in the last few weeks. Despite a +1.02% pop on Friday, AAPL has declined almost 12% this year, erasing over $300 billion in market capitalization. Questions linger over Apple’s AI initiatives, while Microsoft and other tech behemoths deliver tangible earnings growth tied to AI technology. 

The markets concern about Apple’s lack of successful AI products was underscored by Tuesday’s report that the company is abandoning its decade-long electric car project – an undertaking Apple CEO Tim Cook had called the “mother of all AI projects” in 2017.  Investors have sold AAPL in droves in the last month due to a lack of credible AI initiatives from the company such that AAPL has way underperformed the tech heavy NASDAQ 100 (QQQ ETF).

Nvidia (2024) vs Cisco (1999):

History tells us that the valuations investors currently pay for companies like Nvidia (35x Price-to-Sales) are unsustainable. 

In 1999, Cisco Systems (CSCO) was the “belle of the ball,” with investors believing the “internet would change the world.” The thinking at that time was that the whole internet would run on Cisco routers at 50% gross margins. Just as in 1999, extrapolated valuations rarely play out in reality.

As shown in the chart from TheMarketEar below, Cisco’s valuation at its peak of the “Dot.com” mania was at 33x sales. CSCO investors lost 85% of their money when the stock price troughed in October 2002. Over the next 16 years, as investors waited to break even, the company grew revenues by 172% and earnings per share by a staggering 681%. Over the last 22 years, CSCO buy and hold investors earned only 0.67% per year!

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Market Concentration is a Concern:

"Despite the strong returns, many clients have expressed anxiety about the extreme current degree of market concentration relative to recent history," says a team of equity strategists at Goldman Sachs led by Ben Snider.

The 10 largest stocks now account for 33% of the S&P 500 market cap, well above the 27% share reached at the peak of the tech bubble in 2000, and 25% of earnings, according to Goldman.  The chart below shows that stock market concentration is at an all-time high.

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Market Valuation of Growth Stocks:

The valuations of the market's growth sector are trading at astronomical levels relative to its 10-year average while low volatility defensive stocks are cheap.  That’s shown in the chart below, courtesy off the Daily Shot:

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Finally, consider the forward P/E of the “Magnificent 7” (even with the decline of AAPL) versus the rest of the S&P 500 as per this chart:

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Chart Courtesy of Real Investment Advice



Despite ultra-high valuations, we advise AGAINST shorting the market or selling large amounts of stock/ETFs/equity mutual funds you now own.  John Maynard Keynes once said, “Markets can remain irrational longer than you can remain solvent.”

There may be more upside ahead as the stock market advance has recently broadened.  According to Bloomberg Intelligence, the share of S&P 500 stocks at all-time highs in the past month has risen, reaching the highest since early 2022. Yet less than a third of stocks are at record highs. In contrast, by the time the tech bubble was about to burst in early 2000, the ratio of stocks at historic highs was decreasing, from around 60% at one point in 1997 to 20% in 2000.

Nonetheless, the Curmudgeon believes the U.S. stock market is in an AI and liquidity fueled bubble. History shows that once a bubble inflates, it will remain inflated until some unexpected, exogenous event causes a reversal in the underlying psychology. That reversal then reverses psychology from “exuberance” to “fear.”  No one knows what will cause that reversion in psychology.

By the peak of a bubble, it’s common for investors to capitulate to the idea that market valuations/prices “have reached a permanently high plateau,” as Yale economist Irving Fisher proclaimed on October 16, 1929 (just days before the multi-decade October 24th stock market crash).  Then when a sharp drop/severe stock market correction occurs, the mainstream media will say, “No one saw this coming.” Really?

End Quote:

“When positive feedback develops between the trend and the misconception, a boom-bust process gets set into motion. The process is liable to be tested by negative feedback along the way, and if it is strong enough to survive these tests, both the trend and the misconception get reinforced. Eventually, market expectations become so far removed from reality that people get forced to recognize that a misconception is involved. A twilight period ensues during which doubts grow, and more people lose faith, but the prevailing trend gets sustained by inertia.” – George Soros

Be well, success, good luck and till next time………………

The Curmudgeon

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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