Stocks Are Pricier Than They Were in the Dot-Com Era. That Alone Doesn't Make a Bubble. -- Barrons.com

By Teresa Rivas

History doesn't repeat itself, but it often rhymes, as Mark Twain once observed. A quarter-century on from the dot-com bubble, the question for investors is how much of that past is prelude.

The stakes are undoubtedly high. The Nasdaq Composite has consistently outperformed the S&P 500 in 2025 and during the artificial intelligence-fueled rally that began in 2023.

However, tech investors have been burned by being overly enthusiastic in the past: It took some 15 years for the Nasdaq to get back to its highs after the dot-com bubble burst. Even tech bulls admit that the Nasdaq's performance is eerily similar to that of the late 1990s.

That has led some strategists to warn that things are looking frothy.

"The difference between the IT bubble in the 1990s and the AI bubble today is that the top 10 companies in the S&P 500 today are more overvalued than they were in the 1990s," said Apollo Global Management Chief Economist Torsten Sløk in a note Wednesday.

At their height in the early 2000s, the top 10 companies in the index had a 12-month forward price-to-earnings ratio approaching 25 times, he highlights, compared with nearly 30 times in recent years.

Still, others are quick to argue that it's too soon to consider the market in bubble territory.

Yes, valuations look high, admits DataTrek Research co-founder Nicholas Colas, but he says there are mitigating factors to consider. "Computing power, using Moore's Law as it applies to consumer-oriented semiconductors as a proxy, has increased by about 380,000 percent (not a typo) since 1999," he wrote in a recent note.

Moreover, this year has seen less than 20 initial public offerings of generative AI-related companies, compared with nearly 300 internet-related IPOs in 1999 alone. "Unlike the late 1990s Internet craze, there is a real scarcity of public companies with genuine, identifiable profit potential related to Gen AI," he argues.

Elsewhere, Colas notes that in 1999 and 2000 the Federal Reserve was raising interest rates and oil prices were climbing -- a situation that is the opposite of today.

Société Generale Head of US Equity Strategy Manish Kabra makes a similar point, arguing that the direction of interest rates -- rather than the absolute level -- is more important for determining whether the boom will continue or will turn into a bubble.

Moreover, the current U.S. equity risk premium -- i.e., the additional return investors want for putting their money in stocks versus virtually risk-free assets, such as Treasuries -- stands at 3.3% by his math, below the average he calculates is 4.2%. That leads Kabra to believe that while the S&P 500 reflects investor confidence -- itself founded on higher earnings growth and ongoing economic strength -- it wouldn't be in bubble territory until the index hits around 7,500, more than 20% higher than where it stands today.

Ultimately there are meaningful differences between 2000 and 2025. Yet when it comes to new tech, trying to make sure the hype matches the results is a timeless lesson.

Write to Teresa Rivas at teresa.rivas@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

July 16, 2025 15:04 ET (19:04 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.