LIVE MARKETS-Is this AI boom different from the dotcom era?

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IS THIS AI BOOM DIFFERENT FROM THE DOTCOM ERA?

Investors worried that today's AI-driven rally could end like the dotcom boom may be overlooking an important difference, according to retired strategist Jim Paulsen.

In a note published Thursday, Paulsen, who most recently served as chief investment strategist at the Leuthold Group, argues that while the current market shares some similarities with the late-1990s technology frenzy, much of the broader market appears far less dependent on technology leadership than it was during the dotcom era.

His analysis focuses on the relationship between today's "New Era" stocks, primarily technology and communications companies, and the rest of the market. The key takeaway is that many sectors are no longer moving in lockstep with the market's biggest winners.

In fact, Paulsen notes that the price sensitivity of the S&P 500's "Old Era" sectors to New Era stocks has recently fallen to roughly zero. In other words, many parts of the market have become largely insulated from day-to-day swings in technology and communications shares.

That dynamic has already been evident several times this year. During periods when AI and technology stocks sold off, many other sectors continued to advance.

Paulsen also sees potential shelter in defensive areas of the market, including low-volatility and dividend-focused stocks. Value stocks, along with small- and mid-cap shares, also appear less tied to technology leadership than they were near the peak of the dotcom bubble.

To be sure, Paulsen sees growing risks, including elevated valuations, narrow market leadership and investor complacency. Even so, he argues that a decline in AI-related stocks would not necessarily trigger the kind of broad market selloff that followed the dotcom bust. Unlike in 2000, investors today may have more places to hide if leadership stocks stumble.

(Terence Gabriel)

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