Stock Market's Wild Ride: AI Boom Echoes Past Market Bubbles

The stock market has been on a tear, fueled by artificial intelligence optimism, but is this rally built to last? History suggests caution, as similar surges in the past have often been followed by painful corrections.

Double-Digit Gains

The S&P 500 is on track for another year of impressive gains. As of mid-October, the index is up roughly 13% year to date, continuing a rally that began in mid-April despite earlier turbulence from trade tensions.

If the market continues its upward trajectory, it would mark a third consecutive year of double-digit gains. Historically, such streaks are rare, having occurred only four times in the past century.

Echoes of the Past

The four prior periods of back-to-back 20%+ gains in the S&P 500 were the 1920s, 1930s, 1950s, and 1990s. Each era brought immense wealth creation alongside harsh lessons about market sustainability.

The '20s saw rapid industrialization and easy credit, but ended in the crash of 1929 and the Great Depression. The '30s were marked by volatile swings reflecting economic despair. The post-WWII expansion of the '50s saw genuine prosperity. Finally, the internet boom of the '90s created the dot-com bubble, which burst in 2000.

AI: A New Era or Bubble?

Today’s market resembles the '90s, with AI revolutionizing various sectors. Semiconductors and cloud computing lead the charge, but some worry about inflated valuations reminiscent of the dot-com era.

Skeptics warn that AI hype could repeat past exaggerations, leading to a bubble. Still, the key difference is that AI represents a structural shift, akin to electricity or the internet, not a mere fleeting trend.

Investing for the Long Haul

Predicting market surges or stumbles is nearly impossible. The market could cool if earnings catch up, or surge further if AI boosts global output. Either way, this cycle has innovation and speculative excitement, defining every great era of progress.

Despite short-term volatility, the S&P 500 rewards patience. Over the long run, it has delivered compound annual gains of about 7% after inflation, enduring various crises.

Smart Strategies

A better approach than market timing is to own quality businesses with strong management. Investors should hold through volatility, adding to winners and trimming laggards.

The stock market can lose its way, but it always recovers. Across a century of upheavals, resilience has been its defining attribute.