Dot-Com Parallels Unfair as Tech Stocks Seen Supported by ProfitBy
Sector contributes 35% of S&P 500 profit vs 20% in TMT bubble
Earnings support limits downside during selloff: Capital Group
While some money managers such as GMO LLC’s Jeremy Grantham draw parallels with the end of the tech bubble of 2000, others take comfort that downside may be more limited should a correction come, thanks to much stronger earnings support than in the past.
In March 2000, when the S&P 500 Information Technology Index peaked, it traded at about 55 times forward earnings while the sector made up around 20 percent of the S&P 500’s operating profit, according to Bloomberg data. That contrasts with today, when tech stocks are valued at about 19 times earnings and yet contribute about 35 percent of earnings.
“Technology stocks have seen rapid earnings growth, which has contributed to their relatively high valuation multiples,” said Capital Group Cos. fund manager Rob Lovelace in a recent note to clients. “That is very different from what we saw in the TMT bubble of the late 1990s, where valuations expanded but companies had little or no earnings.”
Apple Inc., Alphabet Inc., Microsoft Corp., Amazon.com Inc. and Facebook Inc. -- the biggest players in technology and the five largest U.S. companies by market value -- all reported earnings this week. For the most part there were positives to report. Apple indicated demand for its iPhone X is brisk and Amazon posted its strongest holiday sales growth in eight years.
So, while even by the standards of the Internet age of the past three decades, U.S. stock valuations are heading to extreme levels, Lovelace doesn’t see more than a correction.
“I’m not convinced that it’s going to get to the extreme of an extended bear market,” he said. “High valuations always present a risk, but the downside may be more limited than was the case in past market cycles due to the earnings support.”