The tech industry, once dominated by iconic companies like Cisco and Intel, now faces a warning sign: excessive valuations. The sector makes up 33% of the S&P 500 index, with semiconductor designer Nvidia driving this trend. The company’s market cap has soared tenfold in three years, reaching $4.3 trillion.
Analysts warn that such rapid growth may not be sustainable. “Bubbles burst not because the story is completely wrong, but because around the margins the story is wrong,” says Rob Arnott, founder and chairman of Research Affiliates. The S&P 500 is currently priced at 30 times earnings, significantly higher than its historical average.
Even Nvidia’s valuation, with a P/E multiple of 57, may be overvalued. Other tech giants like Palantir Technologies have seen their market values skyrocket by 2,400% since the start of 2023, despite low growth in sales. Advanced Micro Devices is priced at 97 times earnings.
Investors should take note that past performances are not indicative of future results. Rob Arnott suggests assigning weights to stocks based on adjusted sales, cash flows, book value, and dividends rather than market values. This approach could lead to better performance over the long-term, especially in a market with high valuations.
As AI adoption accelerates, Nvidia’s valuation may continue to drive growth. However, investors should be cautious about how much of this growth is already priced in. With many analysts warning of an impending correction, it’s essential to reassess one’s investment strategy and consider diversification to avoid being caught off guard when the market inevitably corrects itself.
Source: https://www.forbes.com/sites/hanktucker/2025/08/25/why-ai-stocks-are-giving-some-investors-dotcom-bubble-dj-vu