The Wharton professor who called tech stocks a ‘sucker’s bet’ in 2000 before the dotcom crash says we aren’t in another bubble—yet (2024)
Will Daniel
·4 min read
The recent rise of AI-linked tech stocks has been compared to the late-’90s, early 2000s dotcom era by more than a few experts. But Wall Street’s bulls and bears can’t seem to agree on what phase of history we’re repeating.
The optimists argue that the AI gold rush is just getting started, and the firms creating the “picks and shovels” of the modern era are set to benefit for years to come. As Wedbush’s tech analyst Dan Ives put it last year, it’s “a 1995 moment with a long runway of growth ahead” and not a “1999 moment” where markets are on the verge of collapse. But the bears warn that the AI hype is overdone. Recalling the internet boom that drew in crowds of investors to high-flying, but often unprofitable, tech stocks in the late 1990s, Jeremy Grantham even warned this month that AI stocks are in a bubble that will soon burst. The Dow’s 500-point wobble on CPI data suggesting higher-for-longer inflation (and interest rates) has some observers wondering if the beginning of the bubble popping is nearing in 2024.
Even Jeremy Siegel, a veteran market watcher and Wharton finance professor known for his sober takes, warned in his weekly WisdomTree commentary Wednesday that he’s starting to see “overspeculation” in semiconductor stocks linked to AI.
“I won’t call this a bubble at these levels, but there is a frenzy of excitement and many trend followers are piling on the AI wagon,” he warned. “This can continue a long time until we get a big earnings miss, but we know if these trends last long enough, it does not end well.”
Still, when it comes to comparisons to the dotcom bust, Siegel is skeptical. And since he was right there, making prescient predictions just before the tech bubble popped, his words are likely worthy of attention.
“Many make analogies of the AI hype today to the internet boom in 2000,” Siegel wrote Wednesday. “I called out many of the big-cap tech stocks as a sucker’s bet in March 2000 in my Wall Street Journal op-ed at that time. I don’t think we are anywhere near levels that motivated that view.”
Nowhere near ‘sucker’s bet’ territory
Siegel noted Wednesday that the S&P 500 traded at over 30 times earnings in March of 2000, and large-cap tech stocks were selling at double those levels. “Internet firms that had no earnings and traded at huge valuations” were emblematic of the problem, he wrote, adding that “the market as a whole is much more reasonably priced now” at roughly 20 times forward earnings.
Siegel believes that the economy is currently in a “Goldilocks” phase, with relatively low inflation and a strong labor market. If hiring starts to slow, he said he has faith that the Fed will cut interest rates to support growth.
The economy is proving its resilience, and stocks are not yet at bubble levels, according to Siegel, but he still recommended investors look for opportunities in the “unloved non-tech segments” instead of highly valued AI stocks, arguing there are “real pockets of value” in small-caps.
“While I don’t think we’re in a bubble yet, I think investors should be looking for broader participation in the markets,” he wrote. “If the AI revolution is as real as I think it can be, it will not just benefit the megacap tech stocks. All firms will learn how to use and benefit from this great technology.”
Echoing Siegel’s point about AI benefiting more than just megacap tech firms, Goldman Sachs’ chief global equity strategist and head of macro research in Europe, Peter Oppenheimer, recently detailed the rise of technological revolutions throughout the past few centuries in his book Any Happy Returns.
In a follow-up conversation with Fortune, he explained how investors can learn how to navigate the AI era by understanding the history of an underappreciated invention: canals. The canal boom of the 1700s revolutionized the transportation of cargo in the U.K., leading investors to flock to the companies that owned them. That eventually led to a boom and bust cycle in canal stocks on the London Stock Exchange. But while canal stocks weren’t always winning investments, the canals themselves led to a huge productivity boom that helped the entire economy and stock market grow.
The big lesson of it all: The long-term winners of the AI boom might not be the companies developing the technology, but the ones who can use it to create something new and profitable. Choose wisely.
Low interest rates in 1998–99 facilitated an increase in start-up companies. In 2000, the dot-com bubble burst, and many dot-com startups went out of business after burning through their venture capital and failing to become profitable.
What Caused the 2000 Stock Market Crash? The 2000 stock market crash was a direct result of the bursting of the dotcom bubble. It popped when a majority of the technology startups that raised money and went public folded when capital went dry.
The bursting of the bubble caused market panic through massive sell-offs of dotcom company stocks, driving their values further down, and by 2002, investor losses were estimated at around $5 trillion.
A tech bubble bursts when investors start to realize that the amount of money they're putting into startups is more than they'll ever get back. Stocks become less hot and slowly go back to more normal prices. For startups, this means that the amount of cash investment they've been working towards is suddenly sliced.
Then the bubble imploded. As the value of tech stocks plummeted, cash-strapped internet startups became worthless in months and collapsed. The market for new IPOs froze. On October 4, 2002, the Nasdaq index fell to 1,139.90 units, a fall of 77% from its peak.
In addition to the Federal Reserve's questionable policies and misguided banking practices, three primary reasons for the collapse of the stock market were international economic woes, poor income distribution, and the psychology of public confidence.
On April 14, 2000 the index fell by nearly 10 percent, its second-biggest single-day decline ever at the time. By the time the market bottomed in October 2002, the Nasdaq had lost nearly 80 percent of its value. It was a unique environment because not all stocks were crashing.
Simply put, the stock market crash of 1929 caused the Great Depression because everyone lost money. Investors and businesses both put significant amounts of money into the market, and when it crashed, tremendous amounts of money were lost. Businesses closed and people lost their savings.
A milder crash will typically take less time to recover from than a severe crash. For example, it took the stock market just over two years to recover from the 1987 stock market crash. However, it took the market almost six years to recover from the dot-com bubble burst in 2000.
Amazon, eBay, and Priceline were among the companies that managed to survive and adapt through reorganization, new leadership, and redefined business plans.
During the dot-com bubble, eBay's stock price rose from $2 to $58 in just two years, and the company survived the crash by focusing on user experience and expanding into new markets. Cisco: Cisco was founded in 1984 and became the dominant player in networking hardware during the dot-com bubble.
Investors were more cautious and businesses took time to develop their ideas and the industry just grew from there. Amazon of today was not that big during the dot-com bubble. The business model was straight forward with limited cash burn. They sold converted bonds right in time to get the inflow needed to survive.
It's no surprise that Cisco stock plummeted when the dot-com bubble burst because its rise was not supported by the company's business performance. Gross margin also steadily declined; it's not shown for ease of viewing the chart.
The dot-com bubble was a period during which rampant speculation and bullish investment led to the overvaluation (and subsequent crash) of the young internet technology industry on Wall Street.
The bubble burst because it was a bubble. Which brings us to the real culprit: the capital markets. Venture capitalists bear a marked responsibility for the dot-com disaster, as do the investment banks and brokerage houses that hyped dot-com shares. And behind all three stands the Federal Reserve.
Japan experienced a period of boom in the early 1980s, which saw stocks and land prices appreciate immeasurably. Easy credit and rampant speculation, coupled with a lax central bank, contributed to skyrocketing asset prices. But from the late 1980s, prices started stagnating, and they eventually collapsed in 1992.
While the bursting of the clean-tech bubble in 2009 unquestionably resulted in massive losses for investors—an estimated USD 12 billion were lost (Weyant, Fu, and Bowersco*k 2018)—novel technological breakthroughs, massively cost-reduced wind and solar technologies, and new industries between, for example, solar and ...
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