With all the chatter and commentary about the internet (or dot-com) bubble burst and even the great stock market crash of 1929, it’s quite an unsettling time to be an investor in the markets, as the S&P nears new highs after a 2.3% gain for the month of October. For the tech-heavy Nasdaq 100, it was an even brighter month, with the index nearly rising 5% in a month. These are impressive monthly gains, and if you have a look at the Nasdaq 100’s trajectory, you might be growing a tad worried that the chart may be starting to go parabolic.
If the latest October uptick doesn’t precede a correction, or, at the very least, half of a correction (say a 5% pullback or so), expect the word “bubble” to be thrown around by some of the bigger names on Wall Street.
We’ve not only heard the public use the word freely throughout the year, but some big names in tech and finance have even used the word. Of course, not everyone sees a bubble. Some smart folks, including Fed chairman Jerome Powell, commented that things do seem to be different this time around. And, of course, such words are dangerous to use in the investment world.
Is there an AI bubble? And if there is one, does it have to end with 1929- or 2000-esque pain?
However, I do think Powell is right that AI is not the same thing as the internet bubble. Were companies monetizing the technology and using it to replace thousands (or even tens of thousands) at the workplace?
Not to this magnitude. As such, I think investors should give Powell more credit, even as the Fed cuts rates into one of the biggest technological revolutions in generations. As long as earnings power rallies in stocks, and not just hype, I like the chances for the longevity of the AI-driven market rally.
After last week’s earnings, which saw Meta Platforms (NASDAQ:META | META Price Prediction) implode, partly due to its jarring AI spending, I think a “correction” of sorts may already be unfolding in the background. With Meta stock imploding close to 15% in two sessions without nudging the broad market by all too much, I’m inclined to believe that AI excesses might be corrected in real-time without having to drag everything down at the same time.
If Meta can fall without causing a serious market drop, perhaps the bursting of smaller AI bubbles might not have much, if any, impact on the S&P 500, given how small a role that smaller high-flyers in AI have to play when it comes to the broad market, which continues to be dominated by the mega-cap tech titans.
It’s important to learn from history, but it’s another thing to expect the same story to unfold in the near future
As such, I think dismissing stocks as a bubble oversimplifies things and could lead investors to miss out on the real AI winners that are growing not just their AI-related revenues, but their profits. The Meta post-earnings plunge suggests investors are concerned about an AI bubble and are willing to take profits before things have a chance to get out of hand. That’s a good thing, in my view, for this bull market. And I think such increased skepticism going into quarterly results may ultimately prevent a catastrophe akin to the 1929 stock market meltdown.
Though 1929 might be trending again, depending on where you look, I think it has more to do with increased investor caution and the willingness to learn from history to avoid a repeat of what could happen if the current AI rally goes unchecked. Perhaps Andrew Ross Sorkin’s latest book covering 1929 is to thank for giving investors and financial columnists a history lesson on how bad things could get if euphoria stays in the driver’s seat and caution stays comfortably in the backseat.
Ultimately, the bearish commentary and increased knowledge among retail investors of the historic implosions (whether it be 1929 or the Tulip mania from many centuries prior) is a good thing for the bull. And it might push the next big serious market drop (we’re talking severe bear markets and not just mere corrections or mild bear markets) further into the future.
Is more investor caution warranted?
In short, I think increased investor caution is causing some to think more about historic bubble busts, whether that’s the one from 2000 or further back in 1929. And that’s never a bad thing as long as one doesn’t sell out of stocks entirely based on a hunch. With the Nasdaq 100 gaining close to 24% year to date, it’s only prudent to think about what higher valuation metrics could mean for prospective returns to be had over the next three and five years and beyond.
Will AI really warrant paying up for a pricier S&P 500? Perhaps, but it appears that investors are already asking the right questions going into and after earnings. And it’s these earnings that I view as reality checkpoints for an S&P rally that’s now gained more than 90% since its lows of 2022, or a more modest 43% gains since the start of 2022, depending on how you want to frame it.
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