Worried about a tech stock bubble? You're not alone.

This huge rally includes tech stocks' meteoric rise, echoes of 1995, when the Nasdaq was starting to do well, and 1999, when tech stocks had a year-long run of big gains before the bubble finally burst. There are even some very bullish voices questioning whether this is the case.

“The big question for investors is at the forefront this week as NVIDIA releases quarterly/guidance for the ages and the tech sector rises in response: Is this a 1995 moment or a 1999 moment? Is this the moment of the year?'' wrote Wedbush analyst Daniel Ives.

His answer: “I'm absolutely confident. This is a 1995 moment.”

Ives has been one of the most optimistic voices about the transformative power of artificial intelligence and machine learning, a position that has of course been proven correct in recent years.

But other analysts say the current situation is uncomfortably similar to the dot-com bubble seen a quarter century ago, when the Nasdaq lost more than three-quarters of its value from its peak in 2000 to the end of 2002. It warns that it appears to be the case. If it unfolds again, stock market gains could quickly turn into losses that could take years to overcome.

Richard Bernstein, CEO of Richard Bernstein Advisors, argues there are striking similarities between now and 1999. For one, the Federal Reserve eased interest rates and the money supply increased in the years immediately before the tech bubble formed. Second, when the bubble formed, only a few winners of the “new economy” outperformed, and the market was narrow. As a result, expectations for the transformative power of technology have increased.

Indeed, some of the technology companies of the time, Pets.com being one example, were full of red flags in retrospect, including a lack of profitability and speculative enthusiasm. But Bernstein points out that they weren't the ones leading the rally in 1999.

“Few people seem to realize that the tech bubble was actually led by 'real companies,'” he writes. It has a strong balance sheet and cash flow similar to today's Magnificent Seven.

In fact, at the end of 1999, the six largest technology companies were Microsoft;
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Cisco Systems
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Intel, International Business Machine
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oracle
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and Qualcomm
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After the bubble burst, it took between seven and 20 years for stock prices to recover. Overall, an investor who made a new investment in Nasdaq in March 2000 had to wait 14 years before breaking even.

That means investors can't just hope the Magnificent Seven will rise indefinitely, warns Bernstein.

“History seems to repeat itself: new technology hype, massive liquidity, bubble outperformance, investor enthusiasm and risk-taking. Will we see another lost decade for stock markets next? ”

But other strategists argue that the Magnificent Seven doesn't necessarily trade in lockstep, causing an undue concentration of risk for investors. This was the case in past earnings seasons, when stocks like Tesla and Alphabet slumped while Amazon.com and Meta Platform soared.

Bernstein agrees, but says this is why investors don't blindly follow this group. Growth prospects for companies other than the Magnificent 7. ”

In fact, of the approximately 140 stocks in the G7 stock market that are predicted to have earnings growth of 25% or more over the next year, only three are included in the Magnificent Seven and none are in the top 20. yeah.

Therefore, the only way for investors to protect themselves from big tech froth and potential corrections is to diversify, Bernstein says.

Other strategists have made similar arguments, given the undoubtedly high valuations of tech companies. They argue that there are ample opportunities outside the industry for bargain hunters, and that stock hunting can be a win if the market broadens.

Stifel highlighted the potential for sectors such as financials, energy and industrials to become popular again, while Allspring Global Investments highlighted that small- and mid-cap stocks look very cheap.

Investors don't have to abandon technology to look at broader opportunities or think a bubble is imminent.

DataTrek's Nicholas Colas highlights academic research showing that “there are only two types of stocks.” [have been] From 1990 to 2020, we aimed to become a “consistent value creator.”

Technology is, of course, one of Apple.
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Microsoft, Amazon, Alphabet
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And Tencent alone generated 10% of all global stock profits over that 30-year period. But so were high-quality growth stocks.walmart
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johnson & johnson
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and Procter & Gamble are among the top 20 stocks by combined global stock value between 1990 and 2020.

So there's more than one way to keep the party going.

Email Teresa Rivas at teresa.rivas@barrons.com.