The host of “earning money” Charles Payne discusses what the market is reproducing.
If you were investing in the late 1990s, you will remember the euphoria of Boom Dot-Com. All that with a “.com” at the end of his name could increase millions of capital and see his double or triple scholarship course overnight.
Investors thought that the Internet would change everything – which, to be fair, finally did. But between 2000 and 2002, this dream turned into a nightmare when the Nasdaq lost almost 80% of its value, annihilating billions of dollars in wealth.
Today, with the artificial intelligence that makes the headlines and fueled the enthusiasm of investors, many people wonder if we are about to discover another bust with points?
AI feels like the new Internet – a transformative technology that promises to upset the health care industries to finance through entertainment. ( / action)
Parallels with the late 90s
There are undeniable similarities between the two periods. At the time, Internet companies with a little more than a business plan and a website were assessed at astronomical levels. Today, AI feels like the new Internet – a transformative technology that promises to upset the health care industries to finance through entertainment. The story is powerful, and the capital rushes. Recently, Palantir which is a favorite actions of fans at the moment, exchanged with a PE of 522!
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Another similarity is market concentration. In 1999, Cisco, Intel, Sun Microsystems and AOL were the children posters of the boom. Quick advance until today, and the so -called “magnifiment 7” – Apple, Microsoft, Alphabet, Amazon, Meta, Tesla and Nvidia – represent more than 30% of the entire S&P 500.
To put this in perspective, the S&P 500 is supposed to be a diversified index of the best American companies. But if a handful of stocks lead most of the yields, this creates real risks if these companies trip. The market capitalization of the 10 main S&P 500 shares represents almost 40% of the S&P 500 index.
The differences that matter
Although the echoes of the dot-com era are noisy, the differences are even stronger.
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First of all, the evaluations are stretched but not as absurd as 1999. At the time, the price / profit ratio (P / E) before the S&P 500 was greater than 25 – a breathtaking figure for the time. Many Internet actions had no results, which makes traditional assessment measures without meaning.
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Today, the P / E ratio of the S&P 500 oscillates around 21 years. It is high compared to the long-term average of 15-16, but nowhere near the Dot-Com territory. And above all, the giants of technology dominating today’s index are very profitable companies generating huge cash flows. The only area where we see these dot-com models arise are in stocks. Grape the two letters AI next to a stock and it is a food frenzy for investors.
Second, companies that put the costs are not speculative startups with unproven commercial models. Apple, Microsoft and Alphabet are billions of dollars with fortress balance sheets and decades of coherent profitability. NVIDIA – The jewel of the IA trade crown – sells real products with extraordinary demand. Unlike Pets.com, Webvan.com and Etoys (do you remember?), These companies have sustainable sources of income and sustainable competitive advantages.
Is AI the new dowry-com?
There is no doubt that AI feels frothy. Like investors at the end of the 1990s thought that all companies would be transformed by the Internet, many now believe that AI would reshape every corner of the economy. Part of this optimism is justified.
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Internet has changed our way of living our lives today. AI has the potential to stimulate productivity, reduce costs and create entirely new industries. But in the short term, the markets almost always overseas the speed of adoption and the companies of the AI begin so quickly that many are required to fail.
This is where the risk lies: not in the question of whether AI will change the world, but in the speed with which investors think it will happen. History tells us that transformative technologies often go through media threshing cycles. We now thought that people would not yet write checks, but 50% of Americans have still written at least one check in the past 12 months. There will be winners, but there will also be a lot of losers along the way.
Why is not 2000
Despite the media threshing, I do not think that we are heading for a rehearsal of the point-comic accident. Here is why:
- Profits: The largest S&P 500 companies are cash generating machines. Apple alone does more than $ 100 billion in cash flow available per year. It is far from dot-comes that burn money from the past.
- Stronger assessments: American companies are healthier today. Many leading companies have low debt and massive cash reserves. In 2000, the balance sheets were much lower.
- Regulation and maturity: The financial system is more prepared. The lessons of the Dot-Com bust and the 2008 crisis shaped more cautious capital markets.
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Will there be volatility? Absolutely. Certain actions focused on AI are price for perfection and will correct when reality will not meet expectations. But a wholesale collapse of the market as we saw from 2000 to 2002 is unlikely.
The best comparison could be the 1800 -year -old railway boom. The railways transformed the economy and many companies failed along the way. But the infrastructure they created has fueled America’s growth for more than a century. AI can follow the same path – disorderly in the first years, but ultimately changing the world.
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