20 years after dot-com peak, tech dominance keeps investors on edge
SAN FRANCISCO/NEW YORK (Reuters) – As Wall Street approaches the 20th anniversary of the piercing of the dot-com bubble, right this moment’s decade-old rally led by a couple of small gamers exhibits some similarities that cautious investors are retaining an eye fixed on.
FILE PHOTO: A view of the outside of the Nasdaq market website within the Manhattan borough of New York City, U.S., October 24, 2016. REUTERS/Shannon Stapleton/File Photo
March 11, 2000 marked the start of a crash of overly-inflated shares that will final over two years, result in the failure of investor favorites together with Worldcom and Pets.com and take over 13 years for Wall Street to get well from.
That bust ended a 1,000% decade-long Nasdaq .IXIC rally that had been fueled by low rates of interest and a rush to put money into the rising World Wide Web, usually at any value.
Now, after hitting a file excessive on Feb. 13, the Nasdaq has reached over 9,700 factors, nearly double its excessive level in 2000 and about eight instances the extent of its trough in 2002.
Among the so-called “Four Horsemen” of tech shares that fueled a lot of the 1990s tech rally, solely Microsoft’s (MSFT.O) inventory worth has recovered from the dot-com bust. Intel (INTC.O) and Cisco Systems (CSCO.O) stay beneath their 2000 highs, whereas Dell, the fourth member, has since been taken non-public after which relisted on the inventory market.
Microsoft is dueling with Apple (AAPL.O) for the title of Wall Street’s most useful publicly listed firm, with its inventory quadrupling since CEO Satya Nadella took over as chief in 2014 and refocused the maker of Windows on cloud computing, a know-how central to the present rally in Silicon Valley shares.
With a market capitalization of $1.four trillion, Microsoft is now buying and selling at over 30 instances anticipated earnings, its highest valuation since 2002, however nonetheless lower than half of the very best PE it reached through the dot-com period.
Intel and Cisco, not amongst Wall Street’s most-favored tech shares after investors refocused on software program, are buying and selling at PEs in keeping with current years.
Apple, Amazon (AMZN.O), Google guardian Alphabet (GOOGL.O) and Facebook (FB.O) have seen their PEs climb just lately, however nonetheless inside ranges seen in current years as they drove a lot of the S&P 500’s rally.
But throughout the inventory market, earnings multiples are testing ranges that adopted quickly after the dot-com bubble exploded. The S&P 500’s ahead PE just lately hit 18.eight, its highest since 2002. At 22.5, the S&P 500 tech index’s PE is at its highest since 2004, however nonetheless nowhere close to its peak PE of 48 in 2000.
With Apple, Amazon, Alphabet and different know-how firms fueling a lot of Wall Street’s rally for the reason that 2008-2009 monetary disaster, some investors fear the market has change into susceptible to any downturn amongst these firms.
Shares of Microsoft, Apple, Amazon, Alphabet and Facebook alone make up about 18% of the benchmark S&P 500.
“While the levels of valuation are not as extreme, the conclusion is somewhat the same from the market standpoint. If for whatever reason these names falter, it’s going to be very hard for certainly the Nasdaq, which is even more heavily weighted, but even the broader market, the S&P … to perform well,” mentioned Walter Todd, chief funding officer at Greenwood Capital in South Carolina.
At the peak of the dot-com period, know-how shares accounted for over 35% of the S&P 500’s worth. Today, the tech sector accounts for about 25% of S&P 500 market capitalization, in response to Refinitiv Datastream. But combining the tech sector .SPLRCT with the communications sector .SPLRCL, which incorporates Internet-related firms like Alphabet, Facebook and Netflix (NFLX.O), the group accounts for 35% of the S&P 500.
The spate of unprofitable firms looking for to go public in current years had struck some investors as just like the dot-com growth. But WeWork’s spectacular failure to tug off a multibillion-dollar IPO final yr was seen as a constructive signal for these involved about a very ebullient market and investors’ willingness to purchase shares of firms with no clear path to profitability.
More current worries have been sparked by huge — and to some investors, complicated — positive aspects for Tesla (TSLA.O). The electrical car maker’s inventory worth has soared 90% in 2020 alone.
“Watching Tesla this last week felt a lot like the bubble,” mentioned Nancy Tengler, chief funding officer of Laffer Tengler Investments.
Reporting by Noel Randewich; Editing by Alden Bentley and David Gregorio