The AI Bubble Argument: Are We Getting Ahead of Ourselves?

It’s a popular comparison, and in most cases, the comparison is used to predict the bursting of the so-called AI bubble. The argument is that we are getting ahead of ourselves when it comes to the technology that will eventually change the world. The last time this happened, was with the internet in the 1990s.

NASDAQ 100 Then vs. Now: Charting the AI Boom Against the Dot-Com Era

So, let’s take a look, with the help of LPL Research, at the comparison.

Here’s a chart, overlaying the performance of the tech-heavy NASDAQ 100 index, during the 1990s (the blue line) and now (the orange line). The starting point for the dot-com era is from the launch of the first internet browser in 1994. The starting point for the AI boom is from the launch of Chat GPT in 2022.

You can see from a timeline stand point alone, we are early in the buildout process for artificial intelligence, compared to the buildout of the internet. That’s not to say that from here it might be faster, slower, or the same. But, strictly from a performance perspective, the current tech-driven bull market may have a long way to go.

The NASDAQ 100 is up more than 140% since Chat GPT was launched. The same index skyrocketed over 1090% from 1994 to 2000.

4 Key Differences Between the AI Boom and the Dot-Com Boom

But are the two tech booms the same? Not really. LPL Chief Equity Strategist Jeff Buchbinder points out four key differences.

First: Stronger Leadership. The leaders of the AI buildout are funding it mostly with internal cash flow, not speculative capital raising. Their business models are more diversified than the website-oriented business models of the 1990s. Their balance sheets are stronger.

Second: Grounded Valuations. In March 2000, the technology sector peaked at a valuation 58 times consensus forward earnings, compared to 25 today.

Third: More Rational IPOs. The technology companies going public are much larger today, with proven business models and sizable revenue streams.

And finally, AI Is Early in Its Cycle. We are still in the AI buildout phase. AI adoption has barely begun. During the dot-com era, right before the crash, there were lots of consumer websites that could never be sufficiently monetized even after the infrastructure was in place. We don’t know who will ultimately be the AI winners and losers when it comes to adoption, but the strong balance sheets of the infrastructure builders are a good place to start.

Bottom Line: Should Investors Fear a Market Crash?

Don’t let the fear mongering get to you. There’s no reason to believe we are on the verge of a market crash. Could we get over our skies a little? Sure. There will be volatility as investors evaluate the companies changing the world. But, as Buchbinder writes, we think this bull market still has a way to go and expect the technology sector to lead.

Securities are offered through LPL Financial, Member FINRA/SIPC. GenWealth Financial Advisors is an other business name of Independent Advisor Alliance, LLC. All investment advice is offered through Independent Advisor Alliance, LLC, a registered investment adviser. Independent Advisor Alliance, LLC is a separate entity from LPL Financial.