This year, artificial intelligence has driven the stock market to all-time highs, with investor darlings like AI chipmaker Nvidia surging on forecasts of explosive growth and firms keen to showcase their AI capabilities.
However, a touch of anxiety is beginning to cast a shadow over that joy. Stocks have fallen this week as investors fear that the AI boom might collapse, with the S&P 500 down 0.8% on November 18, the Dow Jones Industrial Average down 1.1%, and the tech-heavy Nasdaq Composite down 1.2%.
Comparisons to the dot-com period of the late 1990s, when many internet businesses saw their stock values soar despite experiencing enormous financial losses, are being made in light of the stunning surge in AI-related equities. When that bubble burst in the early 2000s, it destroyed investor portfolios, brought down erstwhile high-fliers like Pets.com, and set off a recession.
When stocks soar on exaggerated growth expectations that eventually turn out to be disconnected to a company’s core fundamentals, it’s known as a bubble. This harsh reality check usually results in overhyped shares returning to Earth.
Beyond the stock market, economists are doubting whether AI will be as revolutionary for businesses as its proponents claim. Advocates claim AI will boost productivity, resulting in increased business growth and profitability.
“The stock market is currently betting heavily on artificial intelligence. Rebecca Homkes, an economist and lecturer at the London Business School, told that ten businesses are driving it all.
Put another way, the S&P 500’s 15% rise this year is mostly attributable to a few tech behemoths that are making significant investments in artificial intelligence. According to Morningstar, the combined market capitalization of the so-called “Magnificent 7″—Google-owner Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla—represents a record 37% of the S&P 500’s overall worth.
Unreasonable enthusiasm?
Millions of Americans who are investing for retirement through 401(k)s and other programs could take notice of that. If investors suddenly turn against AI, the consequences might be dire if the market’s gains are concentrated on a small number of powerful firms, as was the case during the dot-com bubble.
In an email, Janus Henderson portfolio manager Aaron Schaechterle stated, “No one wants to be caught dancing after the music has stopped.”
However, Goldman Sachs analysts point out that market values now are not nearly as stretched as they were in the late 1990s.
The Magnificent 7’s median price-to-earnings ratio, which measures a company’s share price in relation to its profits, is “roughly half” that of the top seven businesses in the late 1990s, according to the investment bank’s study.
They pointed out that while values are high, they are normally not as high as they are during the peak of a financial bubble.
Why things could be different this time
At the central bank’s meeting on October 29, Federal Reserve Chair Jerome Powell was even asked if AI is creating a bubble similar to that of the late 1990s.
This is distinct in the sense that these firms — the ones that are so highly valued — have earnings and so on, Powell explained. So, going back to the 1990s and the dot-com [era], these were ideas rather than businesses.
For instance, Nvidia, the poster child of the AI boom, had a 145% increase in profit as its revenue more than doubled to $130 billion in its most recent fiscal year.
Economists are increasingly doubting whether AI companies can live up to the hype and justify the trillions of dollars in capital expenditures on the data centers and other infrastructure needed to power the AI revolution, even though the stock market may not be in immediate danger of a bubble-bursting crash.
According to analysts, in order for these bets to be profitable, AI must revolutionize American firms by promoting a productivity boom that results in greater corporate development and profitability.
Homkes of the London Business School told, “We want to understand whether this is storytelling or actual tangible gains.”
Tech advocates like Dan Ives, an analyst at Wedbush Securities, believe that the AI surge could trigger a “4th industrial revolution” that might accelerate economic development. He said this week in a research note, “This is an AI Arms Race, and what is driving this next chapter of growth is Big Tech spending, which is NOT slowing down into 2026.”
Homkes acknowledged that the skeptics must accept that this is a game-changing technology, but he also pointed out that this change is probably going to take a lot longer than some AI boosters presently anticipate.
