Worrying About 'Bubble Burst'? Analyst Says There Are Still Upward Space For Tech Stocks
2min read Yesterday, as the S&P 500 hit a new closing high and the Nasdaq reached a new intra-day record, it appears that the overall U.S. stock market is relentlessly soaring. In this year-long stock market carnival, tech companies led by Nvidia have been the most noticeable - yesterday, the stock price of this chip giant even broke the $900 mark, setting a personal record.
However, just as a coin has two sides, some people see a bright future in this round of wealth storm brought by artificial intelligence, while others sense a lurking crisis. For those who hold a pessimistic view, the Internet bubble at the beginning of this century is often brought up as perfect instructional material.
Indeed, in some ways, the current situation is reminiscent of the situation two decades ago: concepts are tied to science and technology, market indicators are far from historical averages, head companies have jaw-dropping valuation levels, etc. All signs seem to suggest that this could be another capital bubble that could be burst at any time.
However, according to analyst Burton Malkiel, the reality is that they are not the same.
On one hand, valuations at the beginning of 2000 were much higher than today. In terms of indicators, the cyclical adjusted price-to-earnings ratio, or CAPE index, of the market at that time was 44. Even with the recent influx of capital into the market, this number is still 10 points higher than it is now.
Moreover, the price-to-earnings ratios of the most popular tech stocks at the time had reached three-digit levels, which seemed like a fairy tale - this number alone, seen from today's perspective, is incomprehensible and unimaginable. However, at that time, the market was indeed willing to pay for these absurd valuations. For instance, in January 2000, the ratio of Cisco Systems' stock price to its earnings reached 100 times.
In contrast, Nvidia, which is currently being touted by many people, has a price-to-earnings ratio of only 66, even with its stock price soaring to $900 per share - it's clear that the market environment and behavior of the time were completely detached from rationality.
And when the market was filled with greed, the ultimate result was always fear.
On the other hand, the high valuations of many companies today are supported. For instance, the chips produced by Nvidia are in high demand for AI model training, which led to a 769% earnings growth for the company in 2023. These are all real financial data, none of which were available during the Internet bubble era to support their valuations.
Even more so, market favorites like Amazon at that time were unable to turn a profit...
In retrospect, it wasn't easy to distinguish between revolutionary technology and pie-in-the-sky concepts at the outset, and investing in transformative technologies often didn't bring investors substantial returns. For example, the emergence of the railway in the 1850s greatly improved the efficiency of communications and commerce, but the speculation bubble around railway stocks broke in August 1857, causing heavy losses to investors.
Planes and color TVs brought substantial gains to the economy, but most early investors also suffered large losses in related industries.
Moreover, whether the market is in a bubble can only be determined after a certain period of time. Although former Fed Chairman Greenspan hinted as early as 1996 that the stock market was experiencing irrational exuberance, this bubble still lasted for several years and many investors who continued to pour money into the market after Greenspan's warning still earned substantial returns.
Perhaps a few years from now, people will look back and find that the current AI boom was also a bubble; perhaps at that time, people will look back and feel that 2023 and 2024 were indeed the starting points of a new round of technological revolution. But from any perspective, it seems that now is not the time for despair and fear.
In Malkiel's view, given that everything about artificial intelligence is in its early stages, if one insists on comparing the current situation with the start of the century, the current market environment is more akin to the U.S. stock market in 1996, not the crash in early 2000 - this suggests that the relevant stock prices should still rise for a few more years.