Is artificial intelligence boosting mega-cap stocks just another dot-com bubble? Chris Harvey, Head of Equity Strategy at Wells Fargo, Appears on Yahoo Finance Live to Discuss Tech Growth Drivers, the Difference Between the Current AI Hype and the Dot Com Bubble Burst, and the Mid-Cap Outlook increase.
video transcript
Julie Hyman: Let’s expand this discussion here. Because, as we’ve talked about, the S&P bull market has been dominated by a handful of mega-cap stocks that Chris called Ubercap driven by AI-related zeal.
But the dotcom era was analog, but how does it compare to the current bull market? We contrasted the technology boom of the beginning of the year with the rise of AI today. And, as Keith pointed out, the current peak has not yet reached the height of the tech bubble. Looking at the returns, the one-month rolling return around the peak of the dot-com bubble was 113% for tech stocks in the S&P 500. It is currently around 27%.
It means that you haven’t gotten that far. He also found that looking at the big tech companies today, the S&P Tech Index is trading at about 26 times forward earnings, more than double what it was at the height of the dot-com bubble. So the question is whether it will help improve our situation. So let’s continue that discussion and call on Chris Harvey again.
Chris, what do you think of that?
Chris Harvey: That’s true. So let’s see what’s similar and what’s different. What’s the difference? It was the late ’90s, and it was the Wild West. I didn’t know who the winner was. Today you at least really know the first winner’s round. Because AI is a business where scale and scale matter. That’s because there are a lot of cloud players. The number of semi-final selections. And it’s a data center.
Second, let’s talk about ratings. There is a huge difference between the assessments now and then. and how stock prices move. As you remember, back then, people were trading with eyeballs and clicks. which makes no sense economically. We’re actually seeing real earnings and real earnings growth here.
But what was like, or what could be like, was just the beginning of the end of the dot-com era. And that means the Fed tightened monetary policy in 1999 and 2000. And that put pressure on the economy. It weighed on old economy stocks. Ultimately, that was the beginning of the new economy stocks.
And what are we looking at today? We can see the Fed tightening quite aggressively. What is happening now is the economy, the economic slump. Some are talking about depression. But I think the term economic stagnation is correct. Old economy stocks are lagging behind. And emerging-economy stocks are also rising. So I think that similarity is a theme with the Fed. But when you look at the valuation, the valuation is nowhere near what it was at the time.
The underlying fundamentals today are much better than they were then. And the application of AI is here now. It’s not 12 months, 26 months, 36 months away. And that creates a very different kind of situation. So even if you want to talk about the bull case, you can’t really talk about the bull case. It’s how you get there. And again, our problem is you put a lot of good news out there. The top five stocks of the S&P 500 have averaged nearly 50% year-to-date gains. That’s a great move.
Uber’s capped valuation is still pretty reasonable. Can you see some benefits? Opportunities for growth? Absolutely. But we just think we need to stop here and now.
Brad Smith: Chris, I always go back to my desk after the show. I listen to Beyoncé’s Renaissance over and over while doing other things. Yesterday, instead, I listened to Salesforce’s AI Day. And indeed, Yahoo Finance’s Brian Sozzi spoke to Salesforce CEO Marc Benioff about the AI boom. Let’s hear what he said.
Mark Bayoff: We have seen many exciting technology waves in our industry: cloud, social, mobile. But this wave of AI will be the biggest that anyone has ever seen. I think the success of OpenAI proves that this will be one of the fastest growing movements not only in the consumer market, but also in the enterprise market.
Brad Smith: So what happens from a stock performance standpoint if it’s the fastest growing part of this overall sector?
Chris Harvey: I’m sure you’ve seen it a lot. In other words, most of the strong stocks are AI-related gross stocks. And I think it will continue. But what we’re also looking at is which companies are adopting AI and are benefiting from it. And we’re looking at a lot of companies. A company you never thought of. So we turned our attention to Kraft Heinz. Kraft Heinz said he is using AI to optimize supply chains and keep things on schedule.
You are looking at Best Buy. They talk about how they use it in customer service. Some hotels are talking about how they use this to predict RevPAR and how it does a better job at predicting RevPAR than many other aspects . So we can talk a lot about what the growth opportunities are on the technology side. But there are also many opportunities in more mundane tasks. And I agree. This is one of the most revolutionary technologies we’ve seen in the last two years. And I believe we’ve only scratched the surface.
Julie Hyman: As for the earlier question, how much is it worth? I think that’s part of it too. I’m curious as it relates to what you just said about all the other companies. If you are considering any of these megacaps or ubercaps, where in the market would be attractive to you if they are too expensive at the moment?
Chris Harvey: So [INAUDIBLE] We still like growing. We prefer cap growth. Poor performance on a multi-year basis. Year-to-date performance has been declining. starting to recover. And with this economic downturn likely to continue for some time, we believe growth is the best place.
Therefore, we seek companies that can help themselves. But if you look at mid-cap growth, it’s 16x. So you can see multiple deployments as well. We believe this is one of the better risk rewards on the market. And it’s starting to work here now.
It’s not that I don’t like Ubercaps. I think it’s just overbought. A pause or some kind of withdrawal is required to reveal any value. But what we like at the moment, what the best risk reward is, is mid-cap growth through valuation and growth opportunity.
Brad Smith: What’s the benchmark when marketing that it needs to be a reality by this timeline? Part of the AI debate, even what I was seeing yesterday, is Salesforce offering generative AI tools. It was telling me about the prompt to do it and the consequences of that: how it speeds things up. This is not so. It’s real to the end consumer, and it’s like a grandma who works with AI to basically get real-time results and feels more productive.
Chris Harvey: So my mother is my grandmother. And she’s talking about AI. Another thing I want to say is that you are watching. I mean, I have a little guy. I have a 10 year old who plays lacrosse. One of my dads has a camera. he brings the camera And it comes with. There are many AI packages around this camera. It chases children.
And after the match, clips, stats and everything else is created. You’re watching it in real time. So if you ask, hey, do we know it’s real? That’s true. We see that reflected in many of the revenues of technology companies. The problem we have is that when we talk to old economy stocks and old economy CEOs, they don’t give us a lot of information or examples of costs and benefits. RevPAR example, supply chain example. If you’re an energy company, they’re talking about how to optimize access to different power sources.
But I still can’t get a clear figure. So let’s get to it. And I think the numbers in the second quarter reveal a lot of that and we have a lot more at this point. But we’re seeing it here now. And, again, this is one of the things that sets him apart from the late 90’s, commercial applications are here now. And adaptation is very fast. And the acceleration will be like nothing you’ve seen before.
Julie Hyman: Gotta get that camera you’re talking about.
Brad Smith: Yes I know.
