US AI-driven rally mirrors dot-com bubble; investors should cut exposure to American equities, says Ametra PMS CIO

The spectacular rally in US technology and artificial intelligence (AI) stocks has pushed valuations to levels last seen during the dot-com bubble, raising the risk of a prolonged correction, says Karan Aggarwal, Co-founder and Chief Investment Officer (CIO) at Ametra PMS. In an interaction with Fortune India, Aggarwal argues that investors—particularly Indian HNIs, family offices, and institutional investors—should reconsider their heavy exposure to US equities and adopt a more diversified global investment strategy.

'Valuation indicators are flashing red'

According to Aggarwal, nearly every major valuation metric suggests that US equities have become excessively expensive. "Over the past 18 months, US markets have entered dot-com-style valuation territory," he says. "The market capitalisation-to-GDP ratio has crossed 220, against an ideal range of 80-120. Even after adjusting for overseas revenues, it remains significantly overvalued."

He also points to the S&P 500 market capitalisation-to-M2 money supply ratio of around 32x, which is higher than levels seen during the 2000 technology bubble. Price-to-earnings (P/E) multiples are hovering near 30x—another level previously witnessed only before the dot-com crash.

Adding to the concern is market concentration. The top 10 companies now account for more than 40% of the S&P 500's market capitalisation, compared with the long-term average of 20-25%.

Better earnings, but not enough to justify valuations

A common argument in favour of the current rally is that today's technology giants generate substantial profits, unlike many dot-com-era companies.

Aggarwal acknowledges the stronger earnings profile but believes it does not fully justify current valuations. "The annualised earnings per share (EPS) growth for S&P 500 companies was 8.9% in the decade preceding the dot-com bubble, compared with 10.5% over the last decade. While the quality of earnings has improved, the growth trajectory is not dramatically different from what investors saw before the 2000 crash," he says.

Based on current US AAA-rated 20-year bond yields of 5.55%, Aggarwal estimates that S&P 500 earnings would need to grow at an annual rate of 16% through 2030 to support prevailing valuations.

"Historically, the S&P 500 has delivered annual EPS growth of around 7% since 1945. Even assuming earnings continue growing at the more optimistic 10-year average of 10%, fair value for the index comes to around 5,300—roughly 30% below current levels."

If earnings revert to the long-term average of 7%, fair value drops to about 4,300. In an extreme scenario where earnings stagnate, similar to the post-dot-com period, the fair value could fall to nearly 1,500, implying an 80% decline from current levels. "Unless investors are betting on once-in-a-lifetime earnings growth of 20% or a collapse in US bond yields to around 1%, it is prudent to move away from US equities over the next few years," he says.

Time for investors to rethink US exposure

The S&P 500 has delivered nearly 800% returns in rupee terms over the past 15 years, making it the preferred international diversification vehicle for Indian HNIs.

However, Aggarwal believes the environment has changed. "With valuations close to 30x earnings and technology accounting for more than 40% of the index—similar to the early 2000s—US equities could underperform global markets over the next three to five years. In a repeat of the dot-com correction, drawdowns of 40-80% cannot be ruled out."

He argues that the US market no longer provides the broad-based diversification it once did. "Historically, investing in the US meant exposure to the world's largest consumer economy and leading technology companies with relatively low correlation to Indian markets. Today, it has effectively become a concentrated AI trade supported by debt-funded capital expenditure." Such concentration, he says, increases portfolio volatility rather than reducing it.

Look beyond US-dominated global funds

Aggarwal also questions the structure of many global equity funds.

Most global funds have nearly 70% exposure to the US, dominated by just 10 companies. Emerging market funds are also highly concentrated, with around 45% exposure to Taiwan and South Korea, where three companies account for almost one-third of the portfolio."

Many of these companies, he notes, are tied to the same AI investment theme. Instead, investors should focus on broader geographical diversification across developed and emerging markets. "The objective of global investing should be to reduce country, sector and thematic risks. Investors should look beyond passive index investing and identify value opportunities across a much wider universe of global markets."

He also recommends increasing allocations to gold as a portfolio hedge against macroeconomic uncertainty and market volatility.

China still not an attractive bet

Despite cheaper valuations, Aggarwal remains cautious on China. He notes that China's economic model, which relied heavily on real estate and technology, has weakened considerably since 2014. The prolonged property downturn has eroded nearly 30% of household wealth, while Chinese technology companies continue to face geopolitical and regulatory challenges.

"Recent data showing nearly a 50% decline in crude oil consumption over the past year points to severe demand weakness," he says.

Although Chinese equities appear inexpensive, Aggarwal believes investors should stay away. "Chinese benchmarks failed to deliver meaningful long-term returns even during periods of 10% economic growth. The current macroeconomic environment provides little confidence that the market will outperform going forward."