Nvidia at $5 Trillion Raises Dot-Com Era Ghosts. Maybe It Shouldn’t.

Nvidia CEO Jensen Huang. (AFP via Getty Images)

Key Points

• The S&P 500 technology sector’s weighting has surpassed 35%, the highest on record, exceeding the dot-com boom’s peak.
• The top six S&P 500 stocks, including Nvidia, now account for approximately 38% of the index’s $58.2 trillion value.
• Despite high valuations, tech stocks’ premium to the S&P 500 is 34%, below the 50% peak seen in the late 1990s.

Soaring tech stocks that are overwhelming the S&P 500. Eye-watering valuations that test new all-time highs on a near-weekly basis. Massive spending commitments tied to a new technology that promises profound economic change but has yet to deliver consistent profits.

Echoes of the dot-com era bubble in U.S. stocks, which collapsed in spectacular fashion in the spring of 2000, are growing louder by day as Nvidia tops the $5 trillion threshold and tech stocks look set to power the S&P 500 past the 7000-point mark for the first time on record.

But this generation’s vintage is different, according to Jeff Buchbinder, chief equity strategist at LPL Financial, who argues that investors shouldn’t be spooked by parallels to the dot-com crash as the current bull market sprints into its fourth year.

Perhaps the most worrying aspect of today’s all-time highs is the fact that the S&P 500 technology sector now comprises the heaviest weighting in the benchmark on record, topping the 35% level reached during the peak of the dot-com boom of the late 1990s.

And with Nvidia now breaching $5 trillion, the top six stocks in the S&P 500 account for around 38% of the index’s $58.2 trillion in value—a staggering level of concentration that is also the highest ever recorded.

“The rally, led by technology stocks riding the artificial intelligence wave, has caused many market-watchers to question whether the stock market is in a bubble and if dot-com crash 2.0 might be coming,” Buchbinder wrote in a note published Tuesday.

He isn’t one of them.

For one, he notes that while the multiples assigned to both the megacap stocks and their information technology brethren are high, at a 34% premium to the S&P 500, they remain well south of tech stocks’ 50% peak in the late 1990s.

Buchbinder also argues that a good chunk of the billions being spent on AI —which has helped add $4.5 trillion to Nvidia’s market value since the rollout of ChatGPT in November 2022—is being financed through existing cash flows from established tech giants.

“Given strong fundamentals, including a 20% earnings growth rate that could be maintained through 2026 as capital investment in AI continues to ramp, and the best earnings revisions of all 11 S&P sectors over the last three and six months, we don’t think technology’s run is necessarily over,” he wrote.

It’s also worth noting some of the many comparative facts making the rounds on Wednesday in advance of Nvidia’s historic opening level.

The AI chip maker has added around $1 trillion in value over the past 112 days, a level that exceeds the combined market capitalization of Exxon Mobil and Mastercard, two companies that have been in business for a combined 155 years.

Put another way, Nvidia captures the new economy’s most-important drivers —chips and data—in a way that is five times the value of the old economy’s most-important ones—oil and money—as captured by Exxon and Mastercard .

Back in 1999, the difference between Microsoft, then the world’s most-valuable company at $350 billion, and Exxon Mobil was less than $200 billion.

Four of the market’s biggest stocks will update investors with their September-quarter earnings this week, with Microsoft, Meta Platforms, Amazon.com, and Google parent Alphabet likely unveiling plans to spend even more billions in an AI land grab that will ultimately cost trillions in new capital by the end of the decade.

“The entire AI semi, storage, memory, networking, optical and server hardware complex depends on forward capex trends at these three companies,” said Mizuho Securities tech, media, and telecom analyst Jordan Klein.

It doesn’t like look investors are ready to bet against them either, even if the backdrop looks a lot like it did the last time tech was defining the bull market.

Write to Martin Baccardax at martin.baccardax@barrons.com