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If the dot-com boom is AI's analogue, the boom is just beginning

This is The Takeaway from today's Morning Brief, which you can sign up to receive in your inbox every morning along with:

  • The chart of the day

  • What we're watching

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Sure, it’s all about inflation and the Fed this week, as investors try to decide whether to buy into a not-so-great-feeling bull market and Goldman Sachs predicts the S&P 500 will end the year at 4,500.

But the influence the macroeconomic environment has had on stocks has been dwarfed by the dominance of the “super seven” or “magnificent eight” – whatever nickname investors like for the small number of mega-cap stocks that have dragged the market higher this year.

We’ve talked about it before, and the reliance of that rally on hopes for AI. We’ve also talked about parallels between the AI enthusiasm and past bubbles.

morning brief image
morning brief image

Going back to the dot-com era of the late 1990s and early 2000s has been a popular point of comparison.

According to one strategist, if indeed that’s the analogue – it means the AI climb has further to go. Truist’s Keith Lerner looked at the peak returns near the end of the tech bubble, comparing them to the recent climb in the S&P 500 Tech Index.

Near the dot-com peak, three-month rolling returns were 69%. Today, they’re 20%. One-month rolling returns were 113%. Now, they’re 27%. And three-month returns were 365%, versus 91% now.

“I think things are rich, somewhat stretched, but different from what we saw at the technology bubble,” Lerner, Truist’s co-chief investment officer and chief market strategist, said in an interview.

He found that the tech sector is trading at around 26 times forward earnings, compared with a zenith of 54.8 during the dot-com bubble. Of course, that period was also characterized by lots of companies that made no money at all – which made it impossible to calculate P/E.

As Lerner pointed out, that’s another important distinction: “I think investors want to see more of a direct line – is there a revenue and income opportunity? I think it’s still important.”

The latest example is Oracle (ORCL), the networking and software giant that reported earnings after the close yesterday, highlighting demand for cloud computing services fueled by client hunger for AI capacity. And next in focus is Advanced Micro Devices (AMD), which today is holding its “AMD Data Center and AI Technology Premiere,” in which it will try to make the case that it can compete against the likes of Nvidia in the AI semiconductor arms race.

All of this isn’t to say investors can safely ignore the big stuff like inflation data and the Fed. But it probably means you can safely expect more Morning Briefs focused on AI as the driver of the market.

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