According to the Wisdom Finance app, the excitement over artificial intelligence has driven a significant increase in the US stock market, which inevitably prompts people to compare it with the 20-year-old Internet bubble and question whether the optimistic sentiment towards this revolutionary technology is causing another stock market bubble.

There are similarities.

The artificial intelligence boom, coupled with the resilience of the economy and stronger corporate earnings, has led the S&P 500 Index to rise by more than 50% since its low in October 2022 and set a new record high this year. Since the end of 2022, the tech-heavy Nasdaq Composite Index has also risen by more than 70%.

Although various indicators show that stock valuations and investor enthusiasm have not yet reached the peak of the turn of the century, there seem to be many similarities between the two. Today, only a small number of large technology stocks, such as artificial intelligence chip manufacturers like Nvidia (NVDA.US), are leading the US stock market, reminiscent of the "Four Horsemen" of the late 1990s: Cisco (CSCO.US), Dell(DELL.US), Microsoft (MSFT.US) and Intel (INTC.US).

Among them, Nvidia's stock price has risen nearly 4300% in the last five years. For comparison, network equipment manufacturer Cisco surged about 4500% in the five years before it reached its peak in 2000.

Valuations have also increased, although the financial conditions of many tech giants seem much better than those of their Internet peers in the late 1990s and early 21st century.

This has raised concerns among investors that the AI-driven surge could increase the risk of this round of US stock market gains ending in the same way as the Internet boom, with an epic crash. During the dot-com bubble, the Nasdaq Composite Index rose almost threefold in just over three years before plummeting nearly 80% from its peak in March 2000 to October 2002. During the same period, the S&P 500 Index, which had doubled, also fell nearly 50%.

Although some Internet stocks such as Amazon (AMZN.US) survived and eventually flourished, others never recovered.

"No one knows exactly what will happen with AI," said Sameer Samana, senior global market strategist at Wells Fargo & Co's Investment Research. He pointed out that the ultimate long-term winners also face the same uncertainties.

According to LSEG Datastream, echoing the dot-com bubble, the information technology sector's share of the total market value of the S&P 500 Index has inflated to 32%, the highest percentage since 2000, when it reached nearly 35%. Only three companies, Microsoft, Apple (AAPL.US) and Nvidia, account for more than 20% of the index.

But there are also significant differences.

However, Datastream's data shows that the current valuation of tech stocks is more moderate than during the peak of the Internet bubble, with a forward P/E ratio of 31, compared with 48 in 2000.

The difference in valuations between Nvidia and Cisco is also evident. Cisco is a key supplier of Internet infrastructure support products and its stock price has not yet reached the peak of the Internet boom.

Datastream's data shows that although both stocks are soaring, Nvidia's forward P/E ratio is 40 times, while Cisco reached 131 times in March 2000.

According to macro analyst at Capital Economics, this current surge is driven more by robust earnings prospects than by ever-increasing valuations, indicating that fundamentals are more of a driving force.

According to an analysis by Capital Economics, since the beginning of 2023, the expected EPS growth rate of today's market leaders in technology, communication services, and non-essential consumer goods industries has been faster than other sectors in the market. By contrast, in the late 1990s and early 21st century, these industries' expected earnings growth rates were similar to other parts of the market, but their valuations soared faster than other stocks.

Lei Qiu, the disruptive innovation stock investment portfolio manager at investment management company AllianceBernstein, pointed out in a blog post that many large companies building cloud infrastructure to support artificial intelligence are generating substantial revenue as clients seek to increase productivity. She wrote, "Rather than waiting for the next big product--a failed strategy during the internet boom, now, the mainstay artificial intelligence companies that are profitable invest in cloud infrastructure to improve efficiency."

According to Datastream, the S&P 500 index has a PE ratio of 21 times, which is much higher than the historical average, but lower than the level of about 25 times in 1999 and 2000.

Macro analyst at Capital Economics said in a report, "Our basic forecast is that this tech bubble will not burst until the valuation of the entire market reaches the level of 2000."

From some indicators, investors' bullish sentiment during the internet bubble was much higher. In a widely tracked survey by the American Association of Individual Investors, bullish sentiment reached 75% in January 2000, just a few months before the market peaked. Recently, this proportion was 44.5%, with a historical average level of 37.5%.

More deadly or stronger

Although the artificial intelligence bubble is not inevitable, many investors worry that if the US economy continues to grow strongly and technology stocks continue to rise, these indicators may become even more tense in the coming months, and may even bring greater damage when they collapse.

"There are many similarities," said Mike O'Rourke, chief market strategist at JonesTrading. "When bubbles occur, they usually originate from...some real, positive fundamental development behind them, which stimulates people's enthusiasm to pay for things at any price."

Erik Gordon, a professor at the Ross School of Business at the University of Michigan, said that the internet was revolutionary, and artificial intelligence will be the same.

"Both of these themes are correct. But that doesn't mean that companies valued on these themes were or are good investments in the past or present," Gordon said. "Many of the network companies that drove the Internet revolution went bankrupt. And many of the artificial intelligence companies that drive such massive changes may also go bankrupt or lose half their value."

In other words, even if artificial intelligence is the next big thing, the valuation of artificial intelligence companies may still be abnormal, and pioneers in the field may still collapse.

Gordon emphasized that most of the pioneers of the Internet were small start-ups, while leaders in the field of artificial intelligence included old profit giants such as Microsoft and Google (GOOGL.US).

"They can lose billions of dollars, but they won't go bankrupt," Gordon said.

However, on the other hand, the new nobility of the Internet does not have a large shareholder base, so when they go bankrupt, "only brave or foolish investors are hurt." In contrast, large technology companies that dominate artificial intelligence account for a large proportion of the market value of the US stock market and are a pillar of pension and retirement investment portfolios.

"The pioneer giants of artificial intelligence will not go bankrupt," Gordon said, "but if the losses of artificial intelligence lead to a drop in their stock price, many investors will suffer losses."

Gordon warned, "This is not a false company bubble, but a high valuation bubble of an order of magnitude."