Once in a lifetime, a technology arrives not just to enhance productivity but to transform the very architecture of the economy. Artificial Intelligence is that force today—pervasive, exponential, and still in its infancy. Like electricity in the early 20th century or the internet in the late 1990s, AI is not just a new tool; it is a new foundation. And with such seismic shifts, traditional valuation metrics—chief among them the Shiller P/E ratio—begin to lose their relevance. When the pace of future earnings is set to outstrip anything the past decade could have prepared us for, a backward-looking metric becomes not a compass, but an anchor.
We’ve seen this story before. The internet was ridiculed by conservative valuation frameworks in the late 1990s. Amazon, trading at an astronomical P/E, was mocked for its lack of earnings. But while the dot-com bubble burst for many, the core truth of the internet’s long-term value was never in doubt. A decade later, cloud computing followed a similar trajectory. In its early stages, companies like Salesforce and later AWS-powered Amazon were valued far above their earnings capacity at the time. The Shiller P/E would have balked at their prices. Yet those valuations proved not only resilient but prophetic, as cloud became the backbone of modern enterprise IT. Then came the smartphone era, ushered in by Apple. When the iPhone debuted, few financial models could account for the platform-based economy that mobile computing would unleash. Uber, Instagram, TikTok, entire industries arose around devices barely a decade old. Once again, earnings lagged behind vision, and valuation ratios lagged behind both.
AI represents a convergence and acceleration of all these past disruptions. It is software that improves itself, infrastructure that predicts demand, content that creates more content. From autonomous research and drug discovery to generative media and synthetic labor, the productivity leaps are no longer theoretical. They’re showing up in code written by machines, in hours saved by copilots, in decisions made by algorithms that learn. And yet, these gains are still only embryonic. What’s priced into today’s high Shiller P/E ratios—for the Nasdaq-100 at over 50, and for some companies over 200—is not yesterday’s earnings. It’s the expectation of a new economy.
A Shiller P/E of 272 might look irrational on the surface. But it’s only irrational if you believe the next ten years will resemble the last ten. Investors don’t. They’re betting that AI will permeate every industry, redefine every workflow, and birth entirely new categories of business. Just as smartphones created billion-user platforms and the cloud birthed trillion-dollar infrastructure providers, AI is laying the groundwork for a future where intelligence is embedded in everything. That is what’s being priced—not history, but trajectory.
Yes, there are risks: regulation, concentration of power, data ethics, and the ever-present chance of hype outrunning real capability. But those risks are being weighed against the conviction that we are witnessing a platform shift of historic scale. In that context, traditional valuation measures like the Shiller P/E ratio are not so much wrong as they are inadequate. They are the instruments of a financial past that cannot compute exponential futures.
We are not in the late stage of a rally. We are in the early stages of a transformation. The same skepticism that misunderstood the internet, underestimated the cloud, and dismissed the smartphone is now staring down AI with the same outdated tools. This time, however, there is precedent for how wrong caution can be. The market is not ignoring risk—it is pricing in a new kind of potential. And in that kind of world, the old math doesn’t apply.