Speculative bubbles always form in financial markets when there is euphoria around an asset that is considered innovative or revolutionary. In the late 1990s, the recession that resulted from the financial markets came from the stock market, and more specifically from tech companies. Indeed, in the 1990s, the stock market experienced a bubble from tech stocks.
A speculative bubble is defined as a spike in asset values within a particular industry, commodity, or asset class to unsubstantiated levels, fueled by irrational speculative activity that is not supported by the fundamentals. The speculative bubble of the 1990s was known as the dot-com bubble. Today, we are again witnessing a new speculative bubble that resembles very much the dot-com bubble. But it is not the dot-com bubble even though it mainly involves tech companies. The current bubble we are witnessing is the AI bubble.
Could the collapse of the AI bubble be worse than that of the dot-com bubble? Economist David Rosenberg, known for his contrarian views, had predicted that the current AI boom could collapse like late 1990s dot-com stocks. According to Rosenberg, the AI surge has striking similarities to the 1990s dot-com boom—particularly when it comes to the Nasdaq 100 breakout over the past six months. He believes that the enthusiasm surrounding AI has become a major distraction from recession risks.
The dot-com bubble burst when capital dried up after a massive adoption of the internet and a proliferation of available venture capital into internet-based companies, especially startups which had no track record of success. Between 1995 and March 2000, the Nasdaq Composite stock market index rose 800%, only to fall 740% from its peak by October 2002, giving up all its gains during the bubble. The burst of the dot-com bubble sank the S&P 500 by roughly 50%.
Nasdaq Composite YTD
Source: Google Finance
This week, Nvidia’s blowout quarter helped drive AI excitement to new levels. The chipmaker boosted its yearly forecast after delivering a strong quarterly earnings beat after Wednesday’s market close. Nvidia CEO Jensen Huang cited booming demand for its AI chips. Nvidia stock gained more than 24% after the report and is now up 133% over the last six months. AI competitors such as Alphabet, Microsoft, and Palantir are also seeing a strong stock surge. The Nasdaq Composite increased 24.53% on a year-to-date basis. For investors wanting to look into this theme for their portfolios, caution is warranted. Exposure can be gained through the individual companies developing the technology or through broader thematic exchange-traded funds such as Artificial Intelligence ETF.
While the dot-com bubble was caused by unrealistically high stock valuations and lack of earnings, the tech current bubble was triggered by the hype around artificial intelligence and the things that it could do to further facilitate human activity. Could the AI bubble potentially create a recession if it burst? It will all depend on its impact. It is fair to say that the possibility of an AI bubble burst could create a recession because the gains of the Nasdaq Composite mainly consist of tech stocks that are all investing in artificial intelligence. A crash of the Nasdaq Composite will undeniably have serious consequences on the entire stock market.
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