AI Stocks Hit New Highs as Dot-Com Era Signals Resurface, Is It a Warning?

• AI stocks have strongly outperformed global markets, with the rally bringing fresh attention to the dot com bubble, rising bond yields, and elevated AI valuations
• The Bloomberg Global AI Index has gained 118% since the start of 2024, compared with 57% for the MSCI World Index and 70% for the MSCI Emerging Markets Index
• Rising bond yields could put pressure on highly valued AI companies, but strong earnings growth means today’s market is not necessarily the same as the dot com bubble era

AI stocks have been outperforming global markets as of late. The Bloomberg Global AI Index has risen 118% since the start of 2024, while the MSCI World Index has gained 57%. The MSCI Emerging Markets Index has also risen about 70% during the same period. The large gap has brought more attention to AI valuations and the growing concentration of the market around AI-related companies. It has also brought back comparisons with the Dot Com Bubble.

Also Read: Kraken Financial Infrastructure Pivot Away From Retail to Focus on Institutional Investors

AI Stocks Are Pulling Away From Global Markets

These numbers have now started to reflect how strong the current AI rally has truly become. The Bloomberg Global AI Index has gained more than twice as much as the MSCI World Index since the start of 2024. The US stock market is also becoming more concentrated around a small group of large technology companies. Bank of America has compared this level of concentration with previous periods of strong technology speculation, including the dot com bubble.

“AI stocks are massively outperforming the global market: The Bloomberg Global AI index has surged +118% since the start of 2024, to near its all-time high. At the same time, the MSCI World Index has risen +57%, underperforming by 61 percentage points. By comparison, the MSCI Emerging Market Index has soared +70% over this period, to near its all-time high. Since the start of 2024, AI stocks have generated an average annualized return of +38%, double the +19% annualized return of global equities over the same period. The AI index has also significantly outperformed emerging markets, which have delivered an annualized return of +23%. AI stocks have left the rest of the global market far behind.”

The bank later shared how AI companies today are also delivering strong profits.

These companies are seeing growing earnings, which can ease some of the pressure around their valuations. Its market indicator also does not show the same level of bubble risk seen during the dot-com era.

Also Read: Crypto Market Dominance Shift Accelerates as Bitcoin and Ethereum Lose 2.2% to Stablecoins

What About Bond Yields?

Bond yields are another significant development that investors have been keeping an eye on as of late. When bond yields rise, stocks can become less attractive to investors because bonds can offer higher returns. Higher rates can also make future company profits worth less today. This matters to companies especially with high AI valuations.

“You can’t make this up. 3 of history’s biggest stock market bubbles all ended the same way. Today, the 10 biggest AI stocks make up 41% of the US stock market, per Bank of America. That’s the same level where the dot-com bubble peaked in 2000. And BofA says each of those past bubbles was ended by a surge in bond yields: – Nifty Fifty, 1973: US yields jumped 2 percentage points – Japan, 1989: Japanese yields jumped 2.3 points – Dot-com, 2000: US yields jumped 2.6 points In all three, the end came once yields had risen by 2 points or more. Meanwhile, US 10-year yields are already up 1.27 points since February. “Quickest way to end US boom is surge in bond yields,” BofA writes.”

The US 10-year Treasury yield briefly moved above 5% in September, reaching its highest level since 2023. It later moved back below 5%. Higher treasury yields often end up tempting investors. This may compel the investors to diversify away from stocks, jeopardizing AI companies and their growing market dominion.

Bank of America, however, has shared how it would take a much bigger rise in bond yields to seriously weaken the current AI rally. The bank has pointed to strong earnings growth among AI companies as one reason the sector has remained resilient.

In conclusion, the market is showing some similarities to the dot com bubble, especially in terms of concentration and investor interest. But this does not imply that the same outcome will happen again.

Also Read: Bank of Japan Faces Policy Dilemma as Japan Bond Yield Surge Past 3% Evaporates Domestic Investor Demand