Wall Street’s Ai-driven boom is pumping share prices all over the world – can it keep going?

Australian investors will see strong parallels between the AI boom and the dot.com era – but this time around, there is one crucial difference.

The extraordinary boom in investments linked to Artificial Intelligence is showing powerful parallels to the internet’s original dot.com boom, with Australian investors once again left very much at the mercy of movements on Wall Street.

Just like two decades ago, the action for investors is largely within a handful of stocks – seven key tech-related stocks have completely underpinned the sharemarket rebound this year, including Amazon, Apple, Facebook (Meta), Nvidia, Google (Alphabet), Microsoft and Tesla.

In fact, these stocks they have lifted the Nasdaq by around 30 per cent and Wall Street’s mainstream S&P index by 14 per cent – watching from the sidelines the ASX is up to 2 per cent.

Australian investors learnt the hard way in the dot.com era that a US-led mania which lifts all stock indices will also engulf all indices when the air finally comes out of the balloon.

In the first flush of excitement around the dot.com economy, US technology stocks – represented by the Nasdaq index – rose more than 500 per cent in the five years before 2000 when the Nasdaq commenced a 67 per cent fall and the wider US market endured a 25 per cent decline.

Unlike the dot.com era, investors in Australia can now directly participate in the US AI-driven boom through online trading. Every one of the top 5 most traded overseas stocks is Australia is linked to the AI boom.

In fact, Tesla – which has been the number one most traded overseas stock for years – is now threatened by second-placed Nvidia Ltd, the chipmaker which has become the litmus test for the sharemarket flag-bearer for the Ai boom

As those core AI-linked stocks soar higher, investors have also started using locally-listed proxies such as data centre stock NextDC to try and capture the action, with its stock up nearly 40 per cent year to date.

Wall Street’s Ai-driven boom is pumping share prices all over the world, but there are many questions whether it can keep going.

Back in at the peak of the dot.com fever between 1998 and 2000 local investors bought telco Telstra for its proximity to the dot.com boom.

However, the boom also produced a swath of long forgotten stocks such as Liberty One and Solution 6 which rode a speculative wave that ultimately ended in losses for many investors.

But there is some evidence that this boom is not – as yet-as risky as the dot.com boom, which at its extreme allowed companies with no profits or revenues to attain substantial valuations.

The crucial difference is that Ai is largely benefiting established companies with a genuine track record.

Microsoft is the outstanding example, since the IT giant also has a 49 per cent stake in ChatGPT, the first generative AI product to hit the mass market.

Microsoft is up 40 per cent his year with a doubling of its share price in five years, but its price earnings ratio at 36 remains tied to planet earth, unlike Nvidia where the price to earnings ratio is 196.

The issue for Australian investors in the months ahead is the distinct risk of listed companies jumping on the AI bandwagon.

On the ASX, this will most likely emerge in the coming earnings season, when companies report from the year to June 30. In the US this year, the number of S&P 500 companies that cited “AI activities” in their earnings call doubled.

More broadly, the question for all investors is if the AI boom is a rerun of the dot.com era. Are we somewhere in the golden years of 1995 to 1999 or are we closer to 2000 when the market crashed?

London-based AI analyst Nevill Dudley-Spencer told The Australian’s Money Puzzle podcast that he could see AI creating the first ever solo billionaire – an AI entrepreneur who could build a global business virtually single-handed.

But Sydney-based fund manager Roger Montgomery is sceptical of Ai big promises, declaring that “the revenues (among AI stocks) remain incremental rather than transformative, which doesn’t justify the heady share multiples.”

In contrast, US market analysts such as Brian Rauscher, head of global portfolio strategy for the Fundstar group, believes the AI boom has a long way to go.

Rauscher told Barrons this week that “we’re so early in this phase of FOMO,” referring to the fear of missing out.

“I would not be surprised before year-end [to see] a brand-new valuation methodology … some new AI metric.”

Originally published as Wall Street’s Ai-driven boom is pumping share prices all over the world – can it keep going?