Cramer says AI rally lacks dot-com bubble conditions

CNBC’s Jim Cramer said Tuesday that the AI-driven rise in U.S. equities does not resemble the dot-com bubble that preceded the 2000 market crash, citing lower market valuations, solid corporate earnings and less pressure from interest rates. He acknowledged speculative areas in the market, but argued they are not representative of the broad universe of listed stocks investors trade.

The remarks came after a year in which enthusiasm over artificial intelligence helped push major indexes to records and drove sharp gains in semiconductor and AI-linked shares. According to CNBC, Micron has risen more than 243% this year, while Sandisk has advanced more than 644%, moves that have prompted comparisons with the late-1990s technology boom.

Cramer, host of CNBC’s “Mad Money,” said companies such as SpaceX may contribute to the impression that risk appetite has become excessive, but he described such cases as outliers. “There are always outliers,” Cramer said, according to CNBC. “There is some froth, but the froth does not represent what we trade. What we own.”

Rates and inflation shape the comparison

Cramer’s argument rests partly on monetary policy. He said a 2000-style collapse would require a sequence of large rate increases, a condition he does not see in the current market. Higher interest rates can weigh on equity valuations because they raise the discount rate applied to expected future earnings and make lower-risk assets more competitive with stocks.

He pointed to Tuesday’s consumer price index report, which CNBC said came in cooler than expected, as easing near-term concern that the Federal Reserve would have to lift rates soon. Cramer also referred to comments from Fed Chair Kevin Warsh, saying Warsh did not sound inclined to tighten policy if inflation remains near the latest CPI levels.

That assessment is Cramer’s view, not a formal Federal Reserve forecast. The Fed’s policy decisions depend on incoming economic data, its inflation mandate and labor-market conditions.

Valuations remain below dot-com levels, Cramer says

Cramer also contrasted today’s equity multiples with those seen before the dot-com crash. He said the S&P 500 traded at more than 25 times forward earnings heading into 2000, citing FactSet data, compared with roughly 20 times forward earnings today.

Forward earnings multiples compare a company’s share price, or an index level, with analysts’ expected profits over a future period. A higher multiple can indicate that investors are paying more for expected growth, though it does not by itself determine whether an asset is overvalued.

Cramer said the present multiple is not low, but remains materially below the level associated with the dot-com peak. “That’s a big difference, and while 20 isn’t exactly cheap, it’s certainly not expensive like 2000,” he said, according to CNBC.

Banks and chipmakers cited as examples

Cramer pointed to major U.S. banks as evidence that large parts of the market are not priced like speculative technology shares. He said Bank of America, Goldman Sachs and JPMorgan reported substantial earnings and revenue beats on Tuesday and trade at about 12 to 18 times forward earnings.

CNBC noted that Cramer’s Charitable Trust, the portfolio associated with CNBC’s Investing Club, owns Goldman Sachs shares. Cramer called the bank valuations “ridiculously cheap” and questioned whether they could be described as frothy.

He made a similar case in technology. According to Cramer, SK Hynix trades at about four times 2027 earnings estimates and Micron at about six times 2027 numbers. He said Nvidia trades at a multiple comparable to the broader market despite its position in artificial intelligence. CNBC noted that Cramer’s Charitable Trust owns Nvidia shares.

Cramer concluded that the defining feature of the current market is the relatively low valuation of many large-cap companies, even as some AI-related stocks have posted exceptional gains.

This story draws on original reporting from CNBC.