Tech stocks are partying like it’s 1999, but Wall Street pros say it’s no irrational bubble

Technology stocks’ gains no longer come at the expense of others

Every time technology stocks soar into the stratosphere, 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 like Facebook, Apple and Netflix — whose shares have all soared more than 50% — is up 28%, putting it on track for its fourth-best annual gain since it soared 86% in 1999.

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 a frothy market, 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 when reality arrived and the euphoria faded.

“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 New York-based investment research firm, noted in a report.

Jonathan Golub, U.S. equity strategist at Credit Suisse, went a step further, ticking off three reasons why tech stocks like Microsoft and Intel, as well as Internet retail names like Amazon, will continue to top the performance charts in the months ahead.

Here’s the case laid out by Golub debunking bubble fears and why he remains bullish on tech:

Tech stocks are far from cheap. But they’re also a lot less pricey than they were in 1999.

Near the peak of the tech bubble at the end of 1999, the Standard & Poor’s 500 tech sector’s price-to-earnings ratio was 44, versus a P-E of 24 for the S&P 500, which meant investors were paying a huge premium to own technology stocks.

In contrast, today tech is selling at 21 times its projected earnings over the next four quarters, which is just a 3point valuation premium to the overall market.

“While tech valuations are above the market today, they are extremely cheap compared to the late-’90s and definitely not worrying,” Golub wrote.

Tech companies aren’t climbing solely on potential or the belief that a “new era” has arrived.

Most leading tech companies are embedded deeply in the fabric of the digital economy and earn billions of dollars each quarter in profit.

Credit Suisse notes that tech stock price swings, or volatility, has declined more than any other industry group over the past 20 years. T

ech stock turbulence has diminished, due mainly to these firms amassing “large war chests” of cash and carrying little, if any, debt.

One of tech’s biggest 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. The biggest revenue gains are forecast for Internet retailers and Internet software companies.

Tech is also expected to grow its earnings over the next year at a quicker pace than all sectors except for energy, which is coming off years of depressed profit growth and is benefiting from a recent rise in crude prices.

There’s another key reason today’s market is different than the one that imploded back in 2000. Tech stock gains haven’t come at the expense of other stocks.

More than 70% of the companies in the S&P 500 are up this year, versus less than half (49%) back in 1999, data from Strategas Research Partners.

And while five tech stocks are among the 10 largest stocks in the S&P 500 this year, the 10 largest stocks in the index contributed to 35.6% of its total gains, down from 49% in 1999, according to Strategas.

The more stocks participating in the rally, the healthier it is.

“This still doesn’t look like 1999,” says Verrone of Strategas. “This isn’t the broadest market we’ve ever seen, but it’s not the narrowest.”