Contrary to popular belief, earnings growth has a very low correlation with decadal stock returns. The primary driver is the change in the valuation multiple (e.g., P/E ratio expansion or contraction). The correlation between 10-year real returns and 10-year valuation changes is a staggering 0.9, while it is tiny for earnings growth.

Today's market is more fragile than during the dot-com bubble because value is even more concentrated in a few tech giants. Ten companies now represent 40% of the S&P 500. This hyper-concentration means the failure of a single company or trend (like AI) doesn't just impact a sector; it threatens the entire global economy, removing all robustness from the system.

If AI is truly transformational, its greatest long-term value will accrue to non-tech companies that adopt it to improve productivity. Historical tech cycles show that after an initial boom, the producers of a new technology are eventually outperformed by its adopters across the wider economy.

Current AI investment patterns mirror the "round-tripping" seen in the late '90s tech bubble. For example, NVIDIA invests billions in a startup like OpenAI, which then uses that capital to purchase NVIDIA chips. This creates an illusion of demand and inflated valuations, masking the lack of real, external customer revenue.

Historically, small-cap companies grew earnings faster than large-caps, earning a valuation premium. Since the pandemic, this has flipped. Large-caps have seen astronomical earnings growth while small-caps have lagged, creating a rare valuation discount and a potential mean reversion opportunity for investors.

The current market is not a simple large-cap story. Since 2015, the S&P 100 has massively outperformed the S&P 500. Within that, the Magnificent 7 have doubled the performance of the other 93 stocks, indicating extreme market concentration rather than a broad-based rally in large companies.

Anchoring valuation on a company's typical price-to-sales ratio helps identify buying opportunities when margins are temporarily depressed. This avoids the pitfalls of methods like the Magic Formula, which can mistakenly favor companies at their cyclical earnings peaks, leading to underperformance.

Financial models struggle to project sustained high growth rates (>30% YoY). Analysts naturally revert to the mean, causing them to undervalue companies that defy this and maintain high growth for years, creating an opportunity for investors who spot this persistence.

The global economy's reliance on a few dominant tech companies creates systemic risk. Unlike a robust, diversified economy, a downturn in a single key player like NVIDIA could trigger a disproportionately severe global recession, described as 'stage four walking pneumonia.' This concentration makes the entire system fragile.