Assessing the Resemblance: Are Current AI Stocks Echoing the Tech Bubble of 2000?

Comparing the price-to-earnings (P/E) ratios of AI stocks today to tech stocks in 2000 can provide some insights, but it's important to note that there are significant differences between the two periods in terms of market conditions, industry maturity, and the nature of the companies involved.

During the dot-com bubble in 2000, many tech stocks had extremely high P/E ratios, often well above 100 or even 200 times earnings. This means that that investors were willing to pay as much as $100 to $200 dollars for each dollar of earnings. This was driven by speculative fervor and expectations of future growth rather than current profitability. When the bubble burst, many of these high-flying stocks crashed dramatically and investors were wiped out.

Today, AI stocks also tend to have high P/E ratios, reflecting investor optimism about the potential of AI technologies to drive future growth and profitability. However, the overall market environment is different, with more mature companies and a more diversified set of industries incorporating AI.

This chart compares the price to earnings ratio of S&P 500 stocks during the tech bubble in March of 2000 to the price to earnings ratio of S&P 500 stocks in March 2024. The largest technology companies tend to be clustered on the left side of the chart. They are the largest companies in the index but represent in general less than 15% of the overall index. As you can see, current PE’s shown by the green bars are higher than they were in 2000 shown by the blue bars. Simply put, the distribution of P/E ratios for the S&P 500 shows that tech stocks today are more overvalued than they were in March 2000.

It's worth noting that P/E ratios are just one metric that should be considered in the context of many other factors such as growth prospects, competitive dynamics, and market conditions.  We will continue to monitor factors like this as we manage your investments.

As always, thank you for the trust and confidence that you have placed in me and my team.