Announcer:
4 Your Money is brought to you by NelsonCorp Wealth Management.
Brandy Auterson-Hurst:
It’s now time for 4 Your Money. We’re joined by Nate Kreinbrink, financial planner at NelsonCorp Wealth Management. Welcome back, Nate.
Nate Kreinbrink:
Thanks again for having me, Brandy.
Brandy Auterson-Hurst:
So there’s a lot of chatter comparing this AI boom to the dot-com bubble of the late ’90s. Is that a fair comparison?
Nate Kreinbrink:
Well, there may be a few similarities. However, when we look at the actual numbers, it may not be as similar as what people may think. So I brought along a chart today to help illustrate what it is that I’m talking about. So what we’re looking at is what’s driving stock prices today versus what drove them back in the dot-com era. So the top part shows the S&P 500 over the last several years. The blue line there is company earnings, while the red line is basically how much investors are willing to pay for those earnings. So ideally, what we want to see is the blue line or the earnings doing the heavy lifting. And that’s exactly what is happening currently. Earnings have nearly doubled since 2021, while the valuation measure in red has actually fallen.
Now, if we look at the bottom of the chart, which is showing those same two lines, but back in the dot-com years of the late ’90s, it’s kind of the opposite story. Earnings only grew about 40%, but valuations exploded, nearly tripling in just a few years. So today’s rally is more like buying a house that’s worth more because it’s actually bigger and better built. Whereas the dot-com rally was like the same house getting a higher price tag because everyone just assumed that it would kind of keep going up.
Brandy Auterson-Hurst:
Okay. So does that mean investors don’t need to worry about a bubble at all?
Nate Kreinbrink:
Well, I definitely wouldn’t say there’s zero risk. Anytime that we see one sector leading the markets like AI has, we need to be careful. However, it is encouraging to see the data showing that the current rally has real earnings behind it and a better foundation than what we saw back in ’99.
Past performance is no guarantee of future results. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal.
Indices mentioned are unmanaged and cannot be invested into directly.
This video includes a paid appearance.