Franklin Templeton’s head of ETF investment strategy, Marcus Weyerer, cautions that while some observers liken today’s AI-fueled market surge to the late-1990s internet boom, important differences exist.
Measured from the 2022 low through week 188 of the current rally, the S&P 500 has risen 108%. By comparison, the index gained 127% over the same relative period during the late-1990s cycle. That means the present advance is both shorter in duration and smaller in magnitude than the dotcom-era rally at the comparable point.
Weyerer framed the comparison as incomplete, saying: "We understand the questions surrounding whether today’s AI rally resembles the late-1990s internet boom, but in our view the comparison is imperfect." He argued many of the most hyped names from the earlier era lacked profitability, free cash flow and lasting competitive advantages.
He contrasted that earlier cohort with many of today’s AI leaders, noting they tend to participate across several layers of the AI ecosystem. "Many of that era’s most hyped companies lacked profitability, cash flow and sustainable competitive advantages. By contrast, many of today’s leaders operate at multiple layers of the ecosystem - including chips, cloud infrastructure, software platforms and proprietary data - which may help preserve their pricing power and margins for considerably longer."
Weyerer also emphasized the capital intensity of AI infrastructure as a material differentiator. He pointed out that building and scaling AI requires significant investment across semiconductors, memory, electricity, data centres and other digital infrastructure, which raises barriers to entry relative to some previous technology cycles.
On shifting market focus, Weyerer observed: "Investor attention has shifted from the hyperscalers building AI applications towards the picks-and-shovels businesses supplying the infrastructure that makes them possible." He added, "To us, this signals a maturing of the AI investment cycle rather than a fading of the theme."
The commentary arrives as several major AI-related companies are scheduled to report earnings this week, providing fresh results that market participants will watch for confirmation of revenue, margin and capital expenditure trends.
Context and takeaway
- The S&P 500’s 108% gain from the 2022 low through week 188 is less than the 127% increase recorded in the equivalent phase of the late-1990s cycle.
- Franklin Templeton highlights stronger profitability and multi-layer exposure among current AI leaders versus many dotcom-era firms.
- Heavy capital requirements for AI infrastructure - including semiconductors, memory, electricity and data centres - are cited as increasing barriers to entry and shifting investor attention toward suppliers of that infrastructure.