Is a Stock Market Crash Coming? What History Says a $10,000 Investment in an S&P 500 ETF Could Be Worth at the End of 2027.

The current AI-driven market has been most often compared to the dot-com boom and subsequent crash. That bear market lasted about one and a half years and saw the S&P 500 (SNPINDEX: ^GSPC) fall nearly 37%. There are some key differences between these two markets, however.

One is that the S&P 500 today is actually much more heavily weighted toward the companies leading the AI boom. At the end of 1999, before the market burst, the S&P 500 was still very diversified, with Walmart, General Electric, ExxonMobil, Citigroup, and Home Depot among the index’s top 10 largest holdings. Today, 40% of the S&P weighting is made up of tech stocks, and every one of its top 10 holdings is an AI stock. That could potentially mean a much harsher pullback than the S&P saw in 2000.

However, balancing that out is that, from a valuation perspective, tech stocks are trading at a much lower valuation today than before the dot-com crash. According to Reuters, the technology sector was valued as high as 48 times the next 12 months’ earnings estimates during the dot-com boom. Today, the technology sector trades at a forward P/E of around 19 times. Thus, while the S&P 500 has more tech exposure, it’s also starting from a less frothy position. In fact, the S&P 500’s PEG ratio — the trailing P/E ratio divided by the expected earnings growth rate — is the lowest it’s been in more than 30 years, at around 0.7, according to Yardeni Research. This is only the fifth time it’s dropped below 1 since at least 1995, and well below its 1.3 average.

Another big difference between these two technological innovation periods is the companies doing the spending and the paybacks on these investments. The internet boom was mainly funded by large telecom and cable companies that were building out broadband networks. These were long-term assets, but with relatively slow payback periods.

The AI boom, meanwhile, is being fueled by megacap tech companies. Cloud computing companies are doing the bulk of the spending and generally see quick paybacks. However, the actual assets depreciate much more quickly with around a five- to six-year replacement cycle, creating a permanent AI spending treadmill. As long as end-user demand and token monetization outpace depreciation, the AI flywheel will continue. However, the risk is that if revenue growth starts to slow, the hardware refresh cycle does not, leading to a big squeeze in margins.

A different scenario

With AI spending looking set to continue to boom over at least the next few years, a market crash next year likely isn’t in the cards, in my view. Meanwhile, the market is entering what is historically a very strong period for stocks.

Since 1938, the S&P 500 has risen 95% of the time over the next 12 months following midterm elections. Meanwhile, the index has generated a 14.5% average return from November to November of the following year since 1950. In this scenario, your $10,000 investment in an S&P 500 ETF would be worth nearly $11,500.

Ultimately, trying to predict where the market is headed and when a pullback may occur is a losing bet. While I think the bull market will continue, the best move is to continue to dollar-cost average into an ETF like the Vanguard S&P 500 ETF in both good markets and bad. This is what eventually helps you build long-term wealth.

Geoffrey Seiler has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.