Maybe you’ve had this experience recently: You’re flying high, feeling good about another record high in stocks, and then someone shows up on TV to kill the vibe. “It’s the AI bubble“They say.”It’s like 1999“.
This actually happened to me last week (Before President Trump’s new tariff threat It sent stocks plummeting Friday). I’ve just read some compelling research arguing against the bubble, but my good mood has been ruined by a TV clip saying otherwise. Tired of being injured, I decided to plant my flag in the “not a bubble” camp. (Read the story here.)
Imagine my surprise when the most opposition came from my boss, Steve Russolillo, BI’s news editor and frequent author of this newsletter on Sundays.
Steve worries that we’re living in an AI bubble — one that could get bigger and eventually emerge in a more dramatic way than the dot-com boom and bust.
We decided to sit down and split it.
Ratings
Steve: Joe, I read your article with great interest, but I have to say that the old school thinking in me shudders when Wall Street firms start using unorthodox metrics to justify the rally – as Goldman and Morgan Stanley did.
By contrast, the tried-and-true valuation index — Shiller’s P/E ratio, which dates back to the 19th century — is at a frighteningly high level, above 40. It was higher during the dot-com bubble. Ignore the ratio at your own peril: it accurately forecast the market highs in 1929 and 1999-2000, and also flashed in the red before the housing market crash of the mid-2000s.
atmosphere: I agree that Shiller’s P/E ratio is worrying! But I also think it fails to take into account some key attributes of market-leading companies. If you adjust the valuation metrics for earnings growth, cash flow, and profit margins, the similarities to the dot-com era weaken significantly.
And yes, Wall Street loves to create new metrics to paint the story they want to tell. But in this case, the amendments paint a more accurate and up-to-date picture of the companies’ health.
Company quality
atmosphere: The companies leading the AI revolution are getting stronger. On average, they have better cash flow, operate more efficiently, and are more profitable. This is certainly the case for the biggest names responsible for moving the market: Nvidia, Microsoft, Amazon, etc.
Steve: There is no denying the dominance of large corporations. In fact, they’re a little too controlling for my liking. Mag 7 stocks make up more than a third of the S&P 500. The risks of market concentration are enormous — and it’s rare for so few companies to make up such a large percentage of the overall index. Any faltering in even just one of these companies could drag the market down, quickly.
https://media.zenfs.com/en/business_insider_articles_888/420f4b9484277a091fa5c962f029aa9f
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