Did you know that during the dot-com bubble, many tech companies had price-to-earnings (P/E) ratios of over 100, compared to AI companies today, which are averaging in the 30s?

Fundamentals like earnings and profitability matter more than hype when evaluating the sustainability of a market trend.

Here’s what you can look forward to in this edition:

• The Stock Market Rally Isn’t Close To Over: First, despite some recent turbulence, the S&P 500 is still poised for growth 🚀

• AI Is Not In A Dot Com Bubble: Next, we’ll learn why AI stocks are fundamentally different from the tech stocks of the dot-com era ❌

• September Has Been Bleak for Stocks—Why Investors Shouldn’t Give Up Hope: Finally, we’ll explain why investors should remain optimistic and avoid reacting to short-term volatility 🌤️

This newsletter is your guide to understanding the current market with confidence and foresight. Ready for liftoff?

The Stock Market Rally Isn’t Close To Over 🚀

The stock market has wavered lately, but the S&P 500 has plenty of upside.

The S&P 500 is still off 1.7% so far in September.

One of investors’ biggest concerns is the health of the technology sector, specifically artificial intelligence, as enthusiasm about the AI revolution has fueled much of the rally this year and in 2023 as well.

Some argue that the AI bubble has already burst, leaving the stock market without a major driver.

But the evidence suggests that AI wasn’t in a bubble that hasn't burst.

Unlike the dot-com bubble, AI has been fueled by higher earnings rather than just valuations 📊

Earnings from AI companies consistently beat analyst estimates.

There are other possible explanations for chip stocks’ recent tumble.

Investors might be skeptical that market leaders can sustain high profit margins—even in a healthy demand environment—and possible antitrust regulation is another cloud looming over the sector.

The threat to supply chains from geopolitical saber-rattling could also be weighing on chip stocks, along with fears that the broader U.S. economy is substantially weakening 📉

While concerns about the sustainability of profit margins, greater global fracturing, and the threat of antitrust action all arguably provide some justification for investors to recalibrate the likely future earnings growth of some of the AI champions, the economic backdrop should remain conducive to strong performance of AI equities through the end of 2025.

AI Is Not In A Dot Com Bubble ❌

Big AI tech stocks have price-to-earnings ratios in the mid-30s—a far cry from the 90 times reached by companies like Microsoft and Oracle a quarter-century ago in the dot com bubble.

Likewise, many big tech companies’ returns on invested capital remain strong, showing AI investing is paying off.

The long-term outlook for the game-changing nature of the nascent technology remains bright.

Generative AI tools will only get better from here.

History is full of examples of technology taking years to apply, often depending on pivotal adjacent innovations 📜

So with this technology in the early innings, AI does not need to be perfect today to be revolutionary, nor does the AI rally.

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September Has Been Bleak for Stocks—Why Investors Shouldn’t Give Up Hope 🌤️

In the first week of the month September lived up to its fearsome reputation.

Although the road ahead may remain rocky, investors still have reason to be hopeful.

Aside from September being a tough month for stocks for seasonal reasons, recession concerns may linger, and along with election jitters, there is ample room for ongoing volatility.

Yet that doesn’t mean investors should be spooked 👻

Investors should beware of dark predictions and avoid jumping to negative conclusions during times of transition.

Naysayers argue that the recent weakness is a recessionary signal showing the central bank mistimed its moves.

This kind of pessimism is common and is usually not borne out 🤷

It’s also normal for the market to go through periods of volatility following relative calm, making September’s wobbles less worrisome in a historical context.

The economy is most likely normalizing, rather than sliding into recession.

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