Nasdaq’s ‘Right Idea, Wrong Price’ Is Usually A Recipe For Trouble

Nasdaq’s ‘Right Idea, Wrong Price’ Is Usually A Recipe For Trouble

Authored by Ven Ram, Bloomberg cross-asset strategist,

During the dotcom bubble, stock traders had the right idea, but had no clue how to price that view. Now they are grappling with much the same issue – only, this time around, substitute dotcom with artificial intelligence. 

The bigger concern is that the gravy train may run as long as it did then.

The Nasdaq 100 has surged to a record, putting it within striking distance of 17,000, enough to induce vertigo in anyone looking at valuation metrics.

Investors who are buying at current levels may get an earnings yield of some 3.30% – considerably less than the 4.15% that Treasuries offer. In doing so, they are essentially willing to forgo the safety of Treasuries for the promise of growth from technology stocks.

It’s a no-brainer that artificial intelligence will change the face of technology as we know it.

It may even boost productivity growth, which can augur a profound shift in everything from economic growth to currency valuations. So one can relate to such enthusiasm for technology stocks.

The trouble, though, is coming up with a right price tag on stocks given that transformative potential.

Back during the go-go days of the internet fever, traders bid up anything with a .com tag attached to it, with nary a concern about how they would get their revenue – much less worry about their earnings.

We all know how that movie ended.

Some of the market’s most favored AI bets, such as Nvidia, are now trading at a prospective P/E of 46x.

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