Tech stocks lead the market higher once again and analysts are worried about a repeat of the 2000 tech bubble. Is this time different?
Another day, another all-time high for tech stocks. The Nasdaq rocketed to fresh highs yesterday and the party continued on Tuesday. The Dow Jones Industrial Average (DJIA) surged more than 300 points after the market opened.
As always, the talking heads can’t stop screaming about the dot-com bubble. Here’s Bloomberg’s Dani Burger summing it up this morning.
If you look at this momentum measure of the Nasdaq and its 100 day moving average, it surges to its biggest gap since an ominous echo in history. The last time the gap was this large was at the peak of the dot-com bubble in March of 2000.
Andrew Harmstone at Morgan Stanley appeared on CNBC this morning, warning of “all the signs of a bubble” in tech.
You’ve got valuations that are very high, and in the US, the FANG names count for about 25% of the S&P 500 market cap.
Even Mark Cuban compared the market with the dot-com bubble.
The Dow charged 318.45 points or 1.19% higher after the opening bell. As of 9:55 am ET, the blue-chip index stood at 26,999.32.
Investors can thank Amazon for lifting the entire market higher yesterday and injecting new optimism into stocks.
The S&P 500 was up 0.76% at 3,276.66, while the Nasdaq continues to pierce new highs. Despite lagging the Dow and S&P 500, the tech-heavy index jumped 0.31% to 10,800.49.
There are certainly some echoes of the tech bubble in today’s market. The Nasdaq 100 is trading 21% above its average price for the last 100 days. That hasn’t happened since the peak of the dot-com bubble.
And there are some warning signs within the index itself. Although the Nasdaq surged more than 2% yesterday, only half of the listed companies moved higher. That’s a tell-tale sign of a narrow market. And it happened six times during the 1999-2000 run-up.
That narrow market can be summed up in this simple tweet from economist Cristophe Barraud. Apple, Microsoft, Amazon, and Alphabet now account for more than the entire Japanese stock market. Tech stocks have vastly outperformed the Dow since the March selloff.
Does all this mean we’re about to witness the epic bursting of another technology bubble? Probably not.
We live in a very different world compared to 2000. Tech is no longer a speculative investment. It dominates the world economy. Investor Beth Kindig has been vocal about this issue.
There is some solid support as to why this is not a tech bubble. Mainly, technology now runs nearly every industry.
But what about the sky-high valuations?
Higher valuations are more sustainable today as the revenue growth from tech is much higher than other industries.
As she explains, tech companies have an annual growth potential of 40-80%. Outliers can hit 140% or higher. Software is scalable at a very low cost. Margins are much larger.
As for the traditional industry, and many Dow Jones companies, annual growth rates are stuck at 1-9% with high costs and overheads. Of course, tech trades at higher valuations.
So are tech stocks stretched at these levels? Almost certainly. But are we about to see a spectacular bubble burst? Unlikely.
The Dow continues to ride a wave of positive sentiment. An experimental vaccine by Oxford University and AstraZeneca has buoyed stocks this week. We’re also expecting a $1 trillion fiscal stimulus package to make its way through Congress.
Earnings season is still underway. Dow 30 member Coca-Cola rallied 3% after delivering its second-quarter results before the bell this morning. Philip Morris stock bounced 4.3% after trouncing sales forecasts.
United Airlines and Snap will report earnings after the market closes.
Over in Europe, the 27 EU member states agreed to a €750 billion ($860 billion) emergency fund. The money will be dispersed in grants and low-interest loans to support the countries hardest hit by the pandemic. The deal pushed Italian bonds high and turned the German DAX positive for the year.