The S&P 500's CAPE ratio has climbed to 41, a level reached only twice before in 155 years, in 1929 and 1999. Warren Buffett has criticized the current environment, and analysts tie much of the index's recent earnings growth to the AI boom.
A valuation signal seen twice in 155 years
The S&P 500 has gained roughly 26%, 25%, and 18% over the last three years, well above the index's 100-year average return of 10%. Generative AI has driven much of that outperformance, as the technology promises to reshape the global economy.
The cyclically adjusted price-to-earnings (CAPE) ratio, which measures stock prices against average inflation-adjusted earnings over the previous ten years, now stands at 41. That level has appeared only twice in the past 155 years: before the dot-com bubble in 1999 and before the Great Depression in 1929.
AI spending underpins the rally
Around a quarter of Americans use AI chatbots daily, according to Pew Research, and an estimated 78% of companies globally have already adopted the technology for at least one function. Silicon Valley has responded by pouring money into the infrastructure needed to train and run large language models, with capital spending expected to exceed $1 trillion this year.
That spending has lifted hardware giants including Nvidia and Micron. Analysts at Goldman Sachs believe AI is behind half of the S&P 500's recent total earnings growth, underscoring how dependent the market has become on one industry.
Consumer-facing AI names still burn cash
Much of the profit from the AI boom remains concentrated on the picks-and-shovels side of the trade, while consumer-facing companies continue to lose money. OpenAI lost $3.7 billion in the first quarter of 2026, more than half its revenue of $5.7 billion over the same period.
The pattern echoes the dot-com bubble of the late 1990s, when many early-mover internet stocks failed despite the long-term impact of the technology they were pioneering.
Buffett warns against chasing the trend
In a recent interview with CNBC, Warren Buffett criticized the current market environment: "It is tough to find values when everybody is preferring gambling." His long-running strategy favors affordable businesses with strong fundamentals over chasing market trends.
A value-oriented approach can mean missing out on short-term gains, but speculative stocks tend to bust as quickly as they boomed. Buffett's strategy has been proven to work better over the long term.
Source: The Motley Fool
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