Authored by Ven Ram, Bloomberg cross-asset strategist,
During the dotcom bubble, stock traders had the right idea, but had no clue how to price that view. Now they are grappling with much the same issue - only, this time around, substitute dotcom with artificial intelligence.
The bigger concern is that the gravy train may run as long as it did then.
The Nasdaq 100 has surged to a record, putting it within striking distance of 17,000, enough to induce vertigo in anyone looking at valuation metrics.
Investors who are buying at current levels may get an earnings yield of some 3.30% - considerably less than the 4.15% that Treasuries offer. In doing so, they are essentially willing to forgo the safety of Treasuries for the promise of growth from technology stocks.
It’s a no-brainer that artificial intelligence will change the face of technology as we know it.
It may even boost productivity growth, which can augur a profound shift in everything from economic growth to currency valuations. So one can relate to such enthusiasm for technology stocks.
The trouble, though, is coming up with a right price tag on stocks given that transformative potential.
Back during the go-go days of the internet fever, traders bid up anything with a .com tag attached to it, with nary a concern about how they would get their revenue - much less worry about their earnings.
We all know how that movie ended.
Some of the market’s most favored AI bets, such as Nvidia, are now trading at a prospective P/E of 46x.
While that may sound astounding, it’s not uncommon to see multiples of 70x, 80x during times of frenzy.
Which is what worries me.
During the height of the dotcom bubble, the Nasdaq’s P/E ratio soared past three digits while the current P/E of about 30x may seem rather pale.
That is why it’s hard to call a halt to this rally even now (even though downward revisions are dominating upward recently)...
And the S&P is richer than it was at the peak of dot-com bubble...
But suffice to say what Warren Buffett is often fond of saying: “A pin lies in wait for every bubble, and when the two eventually meet, a new wave of investors learns some very old lessons.”