Stock-market bulls convinced of the power of AI to transform the economy often shrug off comparisons to the dot-com bubble a quarter century ago. The real profits are already showing up, unlike in the early days of the internet boom \u2014\u00a0so it is different this time, the thinking goes.<\/p>\n
But Bank of America strategist Michael Hartnett has a message for these investors: “It better be different this time.”<\/p>\n
Hartnett, who has often expressed skepticism of the market’s bull run over the last few years, shared a head-turning chart that highlights just how optimistic investors have become about the impact AI will have. It shows the S&P 500’s price-to-book ratio, which measures the total market cap of the index’s constituents compared to their total assets minus liabilities. <\/p>\n
The valuation measure is at a record high of 5.3, topping the 5.1 level seen in March 2000, at the peak of the dot-com bubble.<\/p>\n
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Bank of America<\/p>\n
Other classic valuation measures show market froth relative to history. For instance, Hartnett also shared a chart showing the S&P 500’s 12-month forward price-to-earnings ratio. Except for August 2020, it’s at the highest level since the dot-com era.<\/p>\n
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Bank of America<\/p>\n
And the Shiller cyclically-adjusted price-to-earnings ratio, which measures current prices against a 10-year rolling average of earnings, is at similar levels to 1929, 2000, and 2021.<\/p>\n
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GuruFocus<\/p>\n
High valuations reflect high expectations for future earnings. Sometimes those expectations turn out to be too elevated, and prices correct, but they don’t necessitate a bubble scenario. So far, many AI firms have continually beat earnings expectations, suggesting the optimism could be justified.<\/p>\n
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Valuations are also better predictors of average long-term returns than near-term performance, and views on Wall Street on where the market goes in the months ahead differ. Though there are calls for caution, many strategists continue to raise their year-end S&P 500 price targets. <\/p>\n