There is no new bull market. It’s a complete illusion. Small-cap stocks aren’t in a new bull market. Emerging markets aren’t in a new bull market. Europe isn’t in a new bull market. What’s happened this year is an illusion driven by AI mania and has not aligned with the historical pre-election melt-up path.
Technology relative to the S&P 500 is at the late 1999/early 2000 level, just before the Tech Bubble burst and a nasty bear market began.
The “Magnificent 7” will soon become atrocious.
A credit event is coming. pic.twitter.com/cIY8W7QQSc
— Michael A. Gayed, CFA (@leadlagreport) September 7, 2023
The echoes of the notorious dot-com bubble that shook the financial world in the late 1990s are resounding louder than ever in the current technology-driven stock market. The astronomical rise in the market values of tech giants such as Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Nvidia (NASDAQ:NVDA), coupled with the fervor around artificial intelligence, can easily result in a nasty burst.
The dot-com bubble of the late 1990s and early 2000s was marked by a frenzied rush into internet-based companies, fueled by a combination of widespread internet adoption, an abundance of venture capital, and a skyrocketing Nasdaq index.
Sound familiar?
How AI Could Be Leading Us to a Stock Market Crash
Fast forward to the present day, and we see a similar pattern unfolding. The AI-driven mania around technology stocks has led to an unprecedented increase in their market values as most other parts of the marketplace have languished. Nvidia, a major beneficiary of the AI frenzy, is the poster child. Other tech majors have also seen their stock prices soar.
The technology sector now makes up an unprecedented 28% of the total market value of the S&P 500. The concentration of market leadership within a few tech giants is eerily reminiscent of the dot-com bubble era. Bubbles form when a rising tide does not lift all boats. The concentration risk in what most people consider a “diversified” market is very real, and very dangerous. Thank tech stocks for that.
The weight of the biggest 5 stocks in the S&P 500 is at an all-time high.
You are being fooled by idiosyncratic risk.
WAKE UP. pic.twitter.com/2IHMUSQVBc
— Michael A. Gayed, CFA (@leadlagreport) September 7, 2023
Some experts believe that the rally can continue for a while longer. They argue that the current tech bubble is cheaper than the 2000 internet bubble. They also assert that today’s tech giants are more disciplined, have established market positions, and possess substantial data sets to exploit, unlike the dot-com companies. All of this is true. But it’s not an excuse to be reckless and play with fire.
As history has shown, market bubbles don’t last forever. They often result in vicious crashes, leading to significant losses for investors. The implications of a tech bubble burst could be far-reaching. Given the tech sector’s significant contribution to the total market value of the S&P 500, a crash in tech stocks could potentially trigger a broader market downturn. There is plenty of precedent for that.
The Bottom Line
The parallels with the dot-com bubble are hard to ignore. However, it is essential to note that not all bubbles burst disastrously. Some tech companies may weather the storm and emerge stronger, much like Amazon (NASDAQ:AMZN) and Cisco Systems (NASDAQ:CSCO) did post the dot-com crash.
Either way, if I’m right that the risk is very high for a credit event, tech stocks become the source of liquidity to fund margin calls by investors. And if that happens, the air will come out faster than most think is possible.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
