AI Stock Hype Mirrors Dot Com Bubble Warns Top Investor

The tech world is buzzing with the promise of Artificial Intelligence, driving a gold rush in AI-related stocks. However, one prominent voice is urging caution. Richard Bernstein, CIO of the $15 billion Richard Bernstein Advisors, sees a troubling pattern emerging that looks a lot like a history lesson investors should have learned.

A stock trader at work at the New York Stock Exchange. Photo by Johannes Eiselle/Getty Images

Echoes of the Dot Com Bubble

Bernstein warns that the universal focus on AI stocks is "eerily similar" to the dot-com craze of the late 1990s and even the 'tronics' boom of the 1960s. The data certainly shows a market on fire. Since ChatGPT's launch in late 2022, the S&P 500 has climbed 54%, and the tech-heavy Nasdaq 100 has skyrocketed by 90%. This surge has pushed valuations to levels that rival historic peaks like the dot-com bubble.

Chart provided by GuruFocus.

Understanding the Current Market Cycle

While Bernstein isn't calling a market top, he firmly states, "We clearly are not at the beginning of a bull market." He points out a paradox in investor behavior. At the start of a bull market, investors tend to be fearful, favoring safer, dividend-paying stocks. In contrast, during later-cycle periods, confidence grows, leading them to chase risk and momentum—exactly what's happening with AI right now. This, he argues, is precisely when safer, lower-beta stocks become more attractive.

The Case for Boring Dividend Stocks

So, where should investors look? Bernstein suggests a pivot to a more "boring" but historically powerful corner of the market: dividend stocks. These are companies that regularly distribute a portion of their earnings to shareholders. He specifically highlights utilities, a sector known for consistent dividends. This strategy allows investors to either take the payments as income or reinvest them, unlocking the powerful force of compounding returns over time.

A Surprising Historical Showdown

To prove his point, Bernstein offers a compelling statistic. "Compounding dividends is boring as all get out, but it's been highly successful through time," he writes. He notes that the long-term performance of compounding dividend income is so effective that the Dow Jones Utilities Index's returns have been "roughly neck-and-neck" with the high-flying NASDAQ's returns since its inception in 1971. This demonstrates that steady, compounding growth can hold its own against volatile, high-growth tech investments over the long haul.

How to Invest in Dividend Stocks

For those interested in this strategy, gaining exposure to a wide range of dividend-paying companies is straightforward through Exchange-Traded Funds (ETFs). Some popular options include the SPDR S&P Dividend ETF (SDY) and the Vanguard Dividend Appreciation ETF (VIG). These funds offer a diversified approach to building wealth through the time-tested power of dividends.