Tech stocks are partying, but it’s not like 1999
Wall Street pros downplay similarities to dotcom bubble
Every time technology stocks soar, comparisons to the Internet stock bubble of 1999 inevitably follow.
And this year is no different — although there might be fewer similarities than one might think, some Wall Street pros say.
The Nasdaq composite, led by popular tech stocks such as Facebook, Apple and Netflix— is up 28%, putting it on track for its fourth- best annual gain since 1999 ( 86%).
Tech leadership in the era of social media, smartphones and artificial intelligence is even more evident when comparing the 39% gain of information technology stocks in the Standard & Poor’s 500 stock index with the broad market’s 16.2% gain.
Those sizable tech gains have led to warnings about dangerously high stock values and comparisons to the dot- com equity bubble that burst in early 2000.
But two Wall Street firms recently downplayed similarities to the irrationally exuberant late 1990s. They backed up their calls with data that suggest the bullishness today isn’t nearly as widespread as it was two decades ago when most stocks with a “. com” in their name jumped in value based on hope rather than profitability, only to suffer massive declines or go out of business.
“For as good as the tech sector has been this year, we still want to resist the temptation to draw 1999- like comparisons,” Chris Verrone, analyst at Strategas Research Partners, a NewYork- based investment research firm, noted in a report.
Jonathan Golub, U. S. equity strategist at Credit Suisse, went a step further, ticking off reasons why tech stocks as well as Internet retail names such as Amazon, will continue to top the performance charts: ❚ Tech isn’t crazily expensive: Near the peak of the tech bubble at the end of 1999, the S& P tech sector’s price- to- earnings ratio was 44, vs. a P- E of 24 for the S& P 500, which meant investors were paying a huge premium to own technology stocks. Today, tech is selling at 21 times its projected earnings over the next four quarters, a three- point valuation premium to the overall market. ❚ Group less risky than in the past: Most leading tech companies are embedded deeply in the fabric of the digital economy and earn billions of dollars in profit each quarter.
Credit Suisse notes that tech stock price swings, or volatility, has declined more than any other industry group over the past 20 years. Tech stock turbulence has diminished. ❚ Profit potential is attractive:
One of tech’s strengths is its earnings power. The group of tech stocks analyzed by Golub are expected to grow revenue at a faster clip than all of the other market industry groups.