Is there an AI Stock Market Bubble?

Many would look at a historical Price-to-Earnings (P/E) chart of the S&P 500 and conclude that we are approaching a stock market bubble. After all, the current P/E just surpassed values only reached at the height of the dot-com bubble. But is this a fair comparison to make?

The year 2000 shared many similarities with today. The introduction of a new technology, the internet, was for the first time being considered seriously by its economic potential. Fueled by high speculation, many internet start-ups sprung up out of nothing and were given extremely high valuations, only for the S&P 500 to drop 40% in the next two years when expectations were not met. At the height of the hype, the S&P 500 P/E had reached 24. In August of 2024, it had hit 28. Are we now cursed with a similar fate?

As always, there is a bit more that can be analysed. What should really be noted is that the Nasdaq - an index which can be said to represent the technology sector - at the height of the bubble had a P/E of 200. In this case then, we can see that a small portion of the total stock market was very obviously overvalued, which in turn inflated the overall S&P 500 P/E more modestly with it. In today’s case, we can see that the Nasdaq P/E remains at 36.

So what does this mean? Well it just means that whatever “hype” exists is not so necessarily tied down to one sector, and is not nearly as obviously high as values seen before. Now this difference can still be explained while maintaining there is a bubble; perhaps the internet was seen as a replacement industry, where AI is instead supplemental, so the present value is being placed more broadly. But in any case, it is at least false to claim that today’s hype industry is as clearly overvalued as seen in the past.