Rob Arnott often admits he's early in predicting bull market tops. So when he draws parallels between today’s market and the dot-com bubble peak, it doesn’t mean a crash is imminent. However, he warns that a substantial decline may be on the horizon.
“This feels a lot like 2000 to me,” Arnott said in a recent interview with Business Insider. “Are we likely to see a bear market in large-cap growth over the next two years? Absolutely.”
Arnott’s cautionary remarks came as the S&P 500—dominated by mega-cap growth companies dubbed the Magnificent Seven—soared 5% in just one week, hitting a record high of over 6,000. This milestone capped a staggering 66% rally spanning more than two years, fueled by economic strength and optimism around artificial intelligence (AI) and market-friendly policy expectations from a potential Trump administration.
Arnott, however, argues that AI enthusiasm, which has driven much of the rally, is already fully priced into the market.
Sky-High Valuations: A Warning Sign
Arnott points to the S&P 500’s Shiller cyclically adjusted price-to-earnings (CAPE) ratio, which now hovers at 37—just below the late-2021 peak of 38 that preceded a 25% market drop and the infamous 2000 dot-com bubble peak of 43, which led to a 50% crash.
“The trouble with lofty expectations is that they must eventually be met,” Arnott explained. Several factors, he says, threaten the current bullish narrative.
One of these factors is the assumption that companies like Nvidia, which currently commands a 90% market share in AI chips, can sustain dominance amid rising competition and falling chip prices. “Five years ago, Intel was expected to dominate,” Arnott noted. “Today, it’s teetering on irrelevance, while Nvidia was barely on anyone’s radar then. Disruptors inevitably get disrupted.”
Arnott also cautions that the pace of AI adoption may unfold more slowly than the market assumes. Drawing a parallel to internet adoption, he said that in 2005, internet usage wasn’t dramatically different from 2000, even though it eventually revolutionized life. AI could follow a similarly extended timeline, he suggested.
Strategists Echo Arnott’s Concerns
Arnott isn’t alone in sounding alarms over market froth. Many prominent strategists and wealth managers have shared similarly cautious views on forward returns, citing high valuations.
Goldman Sachs’ Chief US Equity Strategist David Kostin recently projected a modest 3% annualized return for the S&P 500 over the next decade. He likened the current market, with its disproportionate valuation of select names, to the dot-com era. Similarly, Bank of America’s Michael Hartnett highlighted the extreme outperformance of US equities compared to global markets—a gap that rivals previous asset bubbles like the Nifty Fifty and dot-com peaks.
Hartnett summed up his view succinctly in a recent client note: “Sell hubris, buy humiliation.”
Timing the Market: Easier Said Than Done
Both Arnott and Hartnett acknowledge that calling a market top is notoriously challenging. Falling interest rates and pro-growth policies could fuel further gains, potentially extending the rally for months or even years.
David Einhorn, founder of Greenlight Capital, offered a nuanced perspective at CNBC’s Delivering Alpha conference. “This is a really pricey market, but that doesn’t necessarily make me bearish,” Einhorn said. “Asset prices can remain mispriced for long periods. However, if you’re buying to hold for a very long time, this is unlikely to be the ideal entry point.”
Arnott agrees, suggesting that a more attractive buying opportunity is likely within the next couple of years. For registered investment advisors (RIAs) and wealth managers, the message is clear: caution should be the guiding principle in today’s overheated market. History suggests that patience and disciplined investing will yield better opportunities when valuations normalize.
Navigating an Overheated Market
For RIAs guiding clients through this challenging landscape, Arnott’s insights offer a reminder of the importance of diversification and managing expectations. While AI and mega-cap growth stories dominate headlines, wealth advisors should encourage clients to consider value sectors and international equities, which currently offer more attractive relative valuations.
History has shown that euphoric markets inevitably cool, often providing better entry points for long-term investors. For now, maintaining a defensive posture and preparing clients for potential volatility could make all the difference.
