Bank of America strategist Michael Hartnett has raised concerns about the S&P 500’s record-high price-to-book ratio, indicating the possibility of an artificial intelligence-driven stock market bubble.

What Happened: Hartnett has revealed a chart that underscores investor optimism regarding the influence of AI. The chart illustrates the S&P 500’s price-to-book ratio, a metric that compares the total market cap of the index’s constituents to their total assets minus liabilities, hitting a record high of 5.3.

This exceeds the 5.1 level observed in March 2000, during the height of the dot-com bubble.

As reported by Insider, Hartnett noted that other traditional valuation measures also indicate market froth in comparison to historical data. For example, the S&P 500’s 12-month forward price-to-earnings ratio is at its peak since the dot-com era, with the exception of August 2020.

Despite the high valuations reflecting elevated expectations for future earnings, Hartnett suggests that this does not necessarily imply a bubble situation. Numerous AI companies have consistently surpassed earnings expectations, which could validate the current optimism.

Also Read: Investors Flee Companies Seen as Most at Risk From Artificial Intelligence

Furthermore, Hartnett mentioned that if the market begins to unwind, he anticipates bonds and non-US stocks to benefit. “It better be different this time,” he said.

He provided examples of funds that offer exposure to these trades, such as the iShares Core U.S. Aggregate Bond ETF (AGG) and the Vanguard FTSE All-World ex-US ETF (VEU).

Why It Matters: The warning from Hartnett comes at a time when AI is increasingly influencing the stock market. The high valuations and investor optimism could be a sign of an impending bubble, similar to the dot-com era.

However, the consistent performance of AI firms exceeding earnings expectations may justify the current market scenario.

As the market dynamics continue to evolve, it remains to be seen how these factors will impact the future of the stock market.

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Image: Shutterstock/Nicoleta Ionescu