Indiana Trust Wealth Management
Investment Advisory Services

by Clayton T. Bill, CFA
Vice President, Director of Investment Advisory Services

  • The U.S. equity market, represented by the S&P 500 index, slipped 0.4% this week.
  • AI–themed investment opportunities have attracted a lot of media attention and investor capital. Is the market blowing a late 1990’s-style tech bubble?

Super Micro Computer, Inc. (SMCI), a relatively small company headquartered in San Jose, California with $7 billion in annual revenue, has been publicly traded since 2007. SMCI makes high-performance and high-efficiency servers. The stock has done well over the years and is listed in the Russell 2000 index of small cap stocks.

Over the last year, SMCI is up over 800% and has added tens of billions to its market cap. As of Friday, its market value was four times the size of the next largest stock in the Russell 2000 and larger than 350 of the S&P 500 constituents. Its returns have even outpaced those of NVIDIA, now the third most valuable company in the US by market cap. What changed so quickly for SMCI’s fortunes?

SMCI’s servers provide the infrastructure for the chips that run artificial intelligence (AI) applications. Investors are scrambling to get in front of the newest theme in tech and growth investing, AI. The AI pull has helped drive returns of the “Magnificent Seven” stocks, including NVIDIA and Meta, well above those of the overall market over the last year.

Valuations attached to these names are eye-wateringly high as a result. One does not need to delve into ancient market history for examples of a tech-driven equity market bubble. What would be the impact of this latest craze to the overall market should it unwind? After the dot-com era of the late 1990’s and early 2000’s, it took the US stock market years to recover, and more years for growth-style stocks to mend.

It does not appear that the overall US equity market is in the same realm as it was back then. Bespoke Investment Group recently published a chart showing the rolling 4-year percentage change in the NASDAQ 100, which includes the largest US tech stocks in the market. It is a nice visual reminder of the real multi-year froth involved in equity markets when bubbles occur, as one did in the late 1990’s:

Source: Bespoke Investment Group, February 2024 

There has also been a dearth of initial public offerings (IPOs) of pure-play AI companies analogous to the dot-com IPOs in the late 1990’s. Many of those 1990’s IPOs, such as and Webvan, went to zero when the bubble burst. Instead, AI capital has been invested within some of the largest names in the S&P 500. Microsoft is most in the news on its AI investments, which includes a large ownership stake in OpenAI. Rather than stocks going to zero, should AI investments not bear fruit the result would be a re-rating of P/E multiples on those names.

Editor’s note: Our weekly note will be off next week. Thank you for reading! Always feel free to let us know if there is a topic you would like to hear more about or any questions you may have for the Indiana Trust team.


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