Bank of America strategist Michael Hartnett has voiced concerns about a possible bubble in the AI stock market. This comes in light of valuation metrics reaching historic highs.
Hartnett has pointed out the S&P 500’s price-to-book ratio, which is a valuation measure comparing the total market cap of the index’s constituents to their total assets minus liabilities.
As of August, this ratio hit a record high of 5.3, surpassing the 5.1 level observed at the height of the dot-com bubble in March 2000.
Other valuation metrics also suggest an overheated market, with the S&P 500’s 12-month forward price-to-earnings ratio at its peak since the dot-com era, except for August 2020.
According to the report by Insider, the Shiller cyclically-adjusted price-to-earnings ratio, which compares current prices against a 10-year rolling average of earnings, is reflecting levels from 1929, 2000, and 2021.
Hartnett sent this message to the investors, and as quoted by the outlet: “It better be different this time.”
Also Read: Economist Predicts ‘Gigantic Price Bubble’ in Stock Market Amid Rising Valuations
Despite these elevated valuations, many AI companies have consistently outperformed earnings expectations, indicating that the market optimism might be justified.
However, Hartnett cautions that if the market starts to unwind, bonds and non-US stocks could stand to gain.
The AI stock market has been on a tear, with companies consistently beating earnings expectations. This has led to a surge in optimism, pushing valuation metrics to record highs.
However, the warning from Hartnett serves as a reminder of the potential risks.
The parallels drawn with the dot-com bubble and other historic market peaks underscore the potential for a significant correction if market conditions change. This could have implications not just for AI stocks, but for the broader market as well.
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