Market Lab Report - Market bounce to roll over? AI vs. Dot-Com Bubble

by Dr. Chris Kacher

To roll or rock n' roll

The risks of the current bounce rolling over and the downtrend continuing depend on:

1) whether GDP and its revisions materially comes in under estimates which eventually leads to recession as defined by two negative quarters of GDP,
2) inflation accelerates above expectations prompting the Fed to hike rates, or
3) unemployment soars as it has done in past recessions.

The tariff fears have been the primary reason the market has corrected. Trumps auto tariffs are a temporary setback given the nature of tariffs but could still be tamed before April 2 according to some analysts. Additional concerns which added to the selling pressure were due to overvaluation concerns and dot-com bubble comparisons which I will discuss.

The recent bounce was due primarily to Trump's softer stance on tariffs then Wednesday's selloff due to auto tariffs. It remains a highly news driven market with tariffs at the forefront. Powell said in his testimony that the Fed will regard any inflation due to the tariffs as transitory. With the Fed adopting an easier money approach with QT (quantitative tightening) being lowered from $25 bil to $5 bil/mo as well as more rate cuts on the way, global liquidity has been getting another boost. We also have ISM manufacturing as a leading indicator as discussed in prior reports which global liquidity tends to follow.

The GDP revision beat estimates (2.4% vs est 2.3%), and the Fed's preferred measure of inflation, the PCE, is due on Friday at 830 am ET though @firstsquawk on X just reported that core PCE came in below estimates (2.6% vs 2.7% est).

On this basis, none of the three key metrics above (GDP, inflation, unemployment) are yet showing red flags.

AI vs. Dot-Com Bubble

As for comparisons between AI and the dot-com bubble of the late 1990s, many fear that valuations have gotten way out of hand prompting comparisons. But stark differences are evident.

First, the current PE ratio of the NASDAQ-100 stands around 30 while the dot-com bubble soared to 200, plus many of these companies had no earnings for the foreseeable future.

Second, market cap/GDP reached extremes by the late 1990s compared to today which remains elevated but earnings backed with strong cash flows and proven business models. AI, cloud computing, and digital transformation have driven revenue growth such as NVDA's data center sales soaring 409% YoY in Q4 2024 and Microsoft's Azure which grew 28% YoY in 2024. Individuals, companies, and governments are materially boosting their levels of productivity. In consequence, major tech companies are investing heavily in AI R&D with clear paths to monetization. AI is looking to end up like the transistor, a big discovery that scales well and seeps into every corner of the economy.

Third, the Fed hiked rates to 6.5% to combat inflation after having lowered rates to deal with Y2K fears prior to 2000 which burst the bubble. Today, rates are expected to stabilize or decline, supporting valuations.