Does the AI Bubble Rhyme with the Technology Bubble?

Executive Summary

At the peak of the 2000 Technology Bubble, tech and telecommunication stocks comprised about 41% of the S&P 500. Currently AI stocks, similar to 2000, by some estimates make up nearly 50% concentration of the S&P 500 Index. While Mark Twain stated, “history may not repeat itself, but it often rhymes.” If one looks “under the hood,” many stocks are down from their peak (see first graph). The second graph shows valuation measures reflecting three standard deviations from the mean. No one knows how it will end, but being informed in case it rhymes could prove beneficial.

For further analysis, continue to read The Details below for more information.

“There is an amazing family resemblance about all stories of all booms.”
–Edwin Lefevre

The Details

Frequent readers of my Weekly Market Update might have noticed an absence of newsletters over the past month. This pause was due to a decision by Prudent Financial to return to our prior broker/dealer, First Heartland Capital, Inc. As we are now settling in, it is time for the newsletters to continue. So, where does the market stand today? Those who vividly remember the Technology Bubble might be having déjà vu, but not in an absolute sense. It is more like Mark Twain stated, “History doesn’t repeat itself, but it often rhymes.”

At the peak of the Technology Bubble, technology and telecommunication stocks comprised about 41% of the market capitalization of the S&P 500. The top ten individual companies, like Microsoft, Cisco and Intel, accounted for about 20-25% of the Index. Today, the craze is AI (Artificial Intelligence). The overall concentration is similar to early 2000, although some say broader estimates place the present concentration around 50%. However, the weighting of the top five technology giants, Alphabet, Amazon, Apple, Microsoft and Nvidia, make up a staggering 30% of the S&P 500.

Reported earnings for this sector have been strong. However, see my August 18 newsletter for more details on what is going on under the hood with some of these companies. Many investors look at the overall market, which remains a stone’s throw from its recent peak, and believe all is well. However, investors might be surprised at how poorly the majority of stocks are presently doing. The Kobeissi Letter, via X, recently reported the following as shown in their chart below: a whopping 84% of the S&P 500 stocks are trading at least 10% below their all-time highs, led by Real Estate, Materials, Utilities and Consumer Discretionary. And 59% of S&P 500 stocks are down at least 20% from their peak and – get ready – 41% are down over 30%, and 15% down over 50%.

The vast majority of gains in the stock market are supported by a handful of companies with questionable sustainable earnings. And these companies have pushed valuations near their all-time high. The graph below shows an average of four valuation methodologies, which remain over three standard deviations above its mean, now 187%.

Is this the Technology Bubble? No. Does it appear to rhyme? I would say yes. Valuations are more stretched and more concentrated than during the Technology Bubble. Will the bubble end the same? Who knows. What did the tech-heavy Nasdaq 100 do after it began to drop in March 2000? It fell over 83%. Just so you know, in case it does rhyme.

The S&P 500 Index closed at 7,659, down 2.0% for the week. The yield on the 10-year Treasury Note fell to 5.10 %. Oil prices increased to $101 per barrel, and the national average price of gasoline according to AAA fell to $4.30 per gallon.