- Investors need not fear dot-com 2.0 because of the big rally in tech stocks, analysts say.
- The main difference between today's hype and 1999 is the profitability of big-cap tech companies.
- “We on Wall Street like to go back and look at the dangers. [and say] It will be exactly the same. ”
Tech stocks are rising every day, and the market is full of hype about artificial intelligence. This has led some analysts to believe that the stocks with the biggest gains are so overvalued that they are in a bubble.
So, is the market facing a repeat of the dot-com crash of 2000?
Twenty years ago, the Internet ignited Wall Street and boosted the stock market with a technology-fueled boom. Excitement that the Internet will change everything has sent tech stocks soaring.
Probably everyone who watches the market today has heard it. If you replace “Internet” with “AI”, he will be in 2024. This is why some experts are sounding the alarm about the possibility of dotcom 2.0.
But market experts say those concerns may be overblown. There are key differences that distinguish his late 1990s from today's tech hype, including the profitability of mega-cap tech companies in 2024 and the broader financial environment.
This is why we will not fall into a repeat of the dot-com crash.
Today's hype is radically different
For some tech bulls, this hype is real for one clear reason. That's why AI is simply a game changer.
“AI is the biggest technology trend we've seen since the beginning of the internet in 1995,” Wedbush's Dan Ives wrote in an email to Business Insider. “I've been covering technology as an analyst since the late '90s. This isn't a bubble, it's the beginning of an AI revolution.”
But it goes beyond that. The dot-com crash happened even though the Internet was revolutionary. Today's economic context is also completely different.
“Bubbles are created in bubbles,” Blaine Belsky, chief investment strategist at BMO, told Business Insider. “Just because stock prices are rising doesn't mean it's a bubble.I think people are focusing on things like business results.A crash requires bubbles and excess. is.”
That froth and excess has historically been defined by funding, Belsky explained. This was true in the 1990s, when financial companies, banks, and brokerages poured money into dot-com companies. The relative lack of new IPOs marks a big difference between today and the dot-com era.
“It was IPOs that supported that entire period,” said Quincy Crosby of LPL Financial Management. “So investment banks are benefiting from this phenomenon, and it tends to persist.”
In the 1990s, companies that were not yet generating revenue, profits, or even finished products were entering the IPO market. Investment banking business surrounding the “new paradigm'' was booming. Stock prices will triple or quadruple in one day.
“What was different back then was that it was a promise,” Crosby said.
Today is different. Companies like Nvidia, Meta, and Microsoft are certainly experiencing astronomical growth. But these companies' balance sheets are “rock solid,” Krusoby explained.
“Over the past few years, the majority of Magnificent Seven's stock returns have been driven by earnings growth rather than multiple business expansions,” said Philip D. Lorenz, senior equity analyst at CIBC Private Wealth US. I've come,'' he said.
The market has rewarded the fulfillment of these growth promises. Meta's stock price soared 20% after the company released a strong earnings report, while Microsoft and Amazon also rose after reporting their results for the final quarter of 2023.
“This market is discerning,” said LPL's Mr. Crosby. “If these companies don't deliver, the market will punish them almost immediately.”
Tech retreat is not the same as a crash
Even if tech stocks fall, it's important to draw the line between a pullback and a market crash.
“We've become very dualistic,” says BMO's Belsky. “If stock prices go down, it's a crash — no.”
Some analysts are concerned that a slump in the tech sector could spill over into a broader selloff. This is troubling because tech stocks make up a sizable portion of the market. One market veteran said the huge gains represented a “speculative orgy” in which investors were set to fail over the next decade.
However, that may be the wrong view.
“Valuation is the worst predictor of a stock's future performance,” Belsky said. “And just because stocks are going up doesn't mean they can't keep going up.”
It's also worth noting that tech, while powerful, is not the only driver of today's market rally. According to Belsky, only 139 S&P 500 stocks, or about 28% of the index, outperformed from 2023 through October, but 231 companies (46%) have outperformed since then. It is said that they are doing so.
Belsky and BMO's Nicholas Rockanova wrote in a note Tuesday that even as the top 10 stocks in the S&P 500 have fallen from their all-time highs, the index has fared just fine — but… The first time the company posted a loss was in 2001. This data suggests that the bottom 490 stocks in the S&P 500 index can sustain gains even if the top tech stocks decline.
Markets want history to guide them
A big reason why dot-com comparisons are so common is that we tend to compare our current drives to past trends. Naturally, today's high prices, hype, and valuations in tech stocks create a strong sense of déjà vu.
However, these comparisons may have limitations.
“Normally, I think we on Wall Street like to go back and look at the dangers of the past; [and say] It’s going to be exactly the same,” Belsky said.
Sticking to something close to a historical scenario means investors risk missing the nuances and subtle but important differences between the two eras.
“I think people are obsessed with making phone calls and simplifying analysis of the Magnificent Seven,” he added.
“There's certainly room for speculation in tech stocks today,” said Lorenz of CIBC Private Wealth. “But nothing compares to the tech bubble of 2000, when people quit their jobs, became day traders, and valued newly minted IPOs based on 'eyeballs.'”
