“The current AI bubble is bigger than the 1990s tech bubble,” according to Apollo Global Management’s Torsten Slok.
Is it?
Slok was in the headlines after warning the top 10 companies in the S&P 500 have a higher forward price-earnings ratio than the top 10 companies had during the dotcom bubble years.
His warning follows feverish activity in AI stock Nvidia, which gained $277 billion (€256 billion) in market capitalisation following its blockbuster earnings report – the biggest one-day gain in history.
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However, Slok’s comparison is flawed. Many of the top 10 S&P 500 stocks during the late 1990s weren’t tech stocks, and included companies such as Walmart, Exxon Mobil, General Electric, Citigroup and Home Depot.
As for today, Goldman Sachs data suggests that over the past four years, most of the outperformance enjoyed by the magnificent seven – Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta and Tesla – is attributable not to expanding valuations but to soaring revenues and profit margins.
Yes, they are more expensive than the rest of the S&P 500, but they are also growing much more rapidly. That’s echoed by Barclays, which says that for all the AI bubble warnings, price action “remains pretty aligned with earnings fundamentals”.
If earnings continue growing rapidly, says Barclays, investors will likely give tech high-fliers the benefit of the doubt. Today’s mega-cap tech stocks boast mammoth profits, whereas their dotcom counterparts were generally hyped-up, unprofitable firms. As market historian Prof Paul Marsh bluntly notes, the question today “is whether the price is too high; it’s not whether or not it’s a bunch of junk”.
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