Stock Market Crash: 2 Similarities Between the Dotcom Bubble and Today

Mentions of artificial intelligence in earnings reports have increased 70% since the end of 2022, according to an Accenture chart shared by Roberts in a June 11 note.

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Second, a small group of companies are leading the overall stock market rally, as they did in 2000. For example, the five largest companies in the S&P 500 by market capitalization now make up 27% of the index, which is even more than the 18% share at peak moment of the Internet bubble.

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Another statistic that illustrates this point is that since January, only 30% of S&P 500 stocks have outperformed the index.

But while there are similarities between today and 2000, Roberts is hesitant to condemn the market to the same fate it suffered back then – a brutal decline of around 50%. This time, he is a bit more optimistic due to the strong financial results that are driving several market-leading companies. He stated that in 2000, most of the results of even the largest companies were based solely on future expectations.

Even if that’s the case, Roberts says investors still need to keep in mind how long such strong earnings growth could last.

He shared a list of four things that could derail AI mega-capitalists’ profit performance: reducing demand for AI if companies don’t find it as useful as they hoped; increasing competition from others in the AI ​​space, which then drives prices down; AI providers for companies like Nvidia may start raising prices, reducing profits; even if companies increase production, profit margins may not remain the same if costs increase.

“We are once again experiencing another speculative ‘boom’ as everything related to artificial intelligence captures the imagination of investors,” Roberts said. “What remains unchanged is that analysts and investors once again believe that ‘trees can grow to the sky’.”

Continuation of the Internet bubble?

Many comparisons have been made between 2000 and today. Market valuation levels are one cause for concern, with measures such as the Shiller CAPE ratio sitting near historic highs.

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But as Roberts points out, there are some key differences. Jonathan Golub, chief U.S. equity strategist at UBS, highlighted some of these discrepancies in a client note on Friday.

First, interest rates are much lower, putting less of a burden on growth stocks.

The CBOE Volatility Index, or VIX, is also much lower than before the dotcom crash, showing that investors are more optimistic about the market’s prospects.

However, the future performance of the market also depends on more than just AI trading. Investors largely expect the US economy to avoid recession in the coming months. However, if inflation flares up again or the Federal Reserve leaves interest rates high for too long, the economy could deteriorate and investors will have to lower their expectations.

However, if the economy remains intact, growth could continue for the foreseeable future – as long as profits keep flowing.

“Today is not like the year 2000, but there are similarities. Will it be different this time, or will the trees fail to reach the sky again?” Roberts said. “Unfortunately, we won’t know for sure until we look back through the prism of history.”