Image Source: Pexels

The government may be shut down, but the stock market hasn’t noticed. In fact, stocks just capped another record-breaking month. The S&P 500 gained +2.3%, the NASDAQ climbed +4.7%, and the Dow rose +2.5%.

Millions of Americans are feeling the downside of the shutdown—from disrupted travel to stalled services and furloughed workers. Historically, such uncertainty rattles Wall Street. This time? Investors seem more captivated by the transformative promise of artificial intelligence (AI).

So, the key question today: Is this AI-driven exuberance rational—or irrational?

Exuberance Then vs. Exuberance Now

Having invested for more than 35 years, I’ve seen periods of euphoria and fear. I vividly remember December 1996 when Fed Chair Alan Greenspan famously questioned whether markets were becoming “irrationally exuberant.” Back then, the NASDAQ sat near 1,300. Over the next three years it soared past 5,100 (almost quadrupling), only to crash nearly 80% by 2002.

But here’s the twist: it’s true, we did experience a “tech bubble burst”, but where is the NASDAQ index value today? Amazingly, the index stands at 23,000 (see chart below) – an 18x increase above the 1996 level when Greenspan gave his irrational exuberance speech! So, in hindsight, the sound we heard during 2000 was not the tech bubble bursting but rather an internet Big Bang! The internet wasn’t a speculative fad—it was the foundation of a global transformation.

So, what about AI?

Source: Macrotrends LLC

Internet Cycle vs. AI Supercycle

The internet era lifted the number of online users from zero to five billion—over 60% of the planet (see chart below). The AI wave kicked off publicly in November 2022 with ChatGPT’s release. In under three years, the NASDAQ has more than doubled. That pace isn’t sustainable forever, of course. Bubbles form, emotions swing, and markets correct. But dismissing AI as a fad ignores its unmistakable—and accelerating—impact.

(Click on image to enlarge)

Source: BOND – Mary Meeker

With the rapid appreciation in the stock market, it’s important for investors to identify and understand the warning signs of potential bubble bursting or market crash. In fact, I continue to do my part by studying past crashes. My shipment of Andrew Ross Sorkin’s book, 1929: Inside the Greatest Crash in Wall Street History just arrived and all these lessons remind us that not all booms are bubbles, and not all crashes end innovation.

Not All Bubbles are Created Equal

Major market drawdowns are part of a long-term investor’s journey:

• 1929: Great Crash
• 1973-74: Nifty-Fifty
• 1987: Black Monday
• 2000: Dot-com bust
• 2008: Financial crisis
• 2020: COVID crash

Many pundits today are now asking is this AI surge the next bubble? Valuations, as measured by P/E ratios (Price/Earnings), suggest a very different setup than in 2000.

Back then, many tech leaders traded at 100x+ earnings. Today’s Magnificent Seven tech leaders are elevated, but nowhere near dot-com extremes:

• NVIDIA Corporation (NVDA): 57x
• Apple Inc. (AAPL): 36x
• Microsoft Corp. (MSFT): 36x 
• Alphabet Inc. (GOOG): 32x
• Amazon.com, Inc. (AMZN): 31x
• Meta Platforms, Inc. (META): 23x 

*Source: MarketSurge – only Tesla, Inc. (TSLA) has a P/E higher than 100x.

For the S&P 500 overall, the index has a forward P/E of 22.8x (Yardeni Research), significantly lower than 2000 levels and nowhere near bubble territory. 

Source: Wall Street Journal – March 14, 2000

Life After the Internet and Life After AI Introduction

Think back 25 years:

• Renting movies at Blockbuster before Netflix went digital
• Driving to the bank for deposits
• Buying stamps to mail checks before Venmo or Zelle

Today, those activities feel prehistoric. AI is set to reshape daily life on an even faster timeline — from medicine and logistics to entertainment and marketing.

I’m discovering “AI epiphanies” weekly.

• With a few prompts, I created a beautiful Mother’s Day poem and became a poet hero despite never writing poetry before.
• When I recently needed to write an obituary for my mother, AI helped structure and refine it in minutes instead of taking me hours.
• Just last month I needed to hunt down lobster bisque for a shrimp pasta recipe I wanted to make. It turned into a time-wasting scavenger hunt. Thankfully, AI found it in stock, even when multiple apps insisted it wasn’t available. Needless to say, the recipe was incredibly delicious, and my stomach thanked ChatGPT.

And when it comes to investing? Evaluating biotech companies used to take weeks. Now, detailed research can be synthesized in days without sacrificing rigor. AI isn’t replacing insight — it’s amplifying output.

Not All AI Stories Are “Unicorns and Rainbows”

AI boosts productivity. Higher productivity means some companies need fewer people. Amazon recently announced 14,000 layoffs despite reporting amazing financial results. Microsoft and Meta have also announced thousands of employee layoffs even as profits rise.

This isn’t doom and gloom — it’s innovation cycles in action. Technology displaces tasks before ultimately creating new industries and roles.

So… Rational or Irrational?

Although there has been much debate regarding whether we are in an AI bubble, from my perspective, we are in the very early innings of a long AI revolutionary game. There are definitely pockets of frothiness that expose investors to undue risk, but if you can follow a disciplined, diversified, valuation-sensitive investment strategy, like we implement at Sidoxia Capital Management, I feel that the current exuberance is more rational than irrational.

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