Last week, we delved into some investors’ obsession with the “Magnificent 7” tech stocks. However, for every enthusiast, skeptics worry that tech stocks might be partying like it’s 1999.
With rising market concentrations, a new AI-driven narrative, and high valuations, some investors fear a repeat of the dot-com bubble, which saw the NASDAQ plummet nearly 80%.
Could the recent performance of the Magnificent 7 be the canary in the coal mine for investors worried about a sequel to the dot-com bubble burst? Let’s take a closer look at four data points to better understand the risk today.
Market Concentration
The recent tech rally has seen the largest companies grow enormously. The chart below shows the concentration of the top 10% of U.S. stocks over the past century. The parallels between the dot-com bubble and the Great Depression are striking.
The critical difference today is the rate at which market concentration has risen. Previous crashes saw faster, more euphoric increases.
Canary in the Coal Mine Risk? High
Tech Sector Returns Then & Now
Compare the Nasdaq 100 returns in the five years before the dot-com bubble burst with today:
| Year | Return (1995-1999) | Return (2019-2023) |
| 1995 | 42.5% | 2019: 38.0% |
| 1996 | 42.5% | 2020: 47.6% |
| 1997 | 20.6% | 2021: 26.6% |
| 1998 | 85.3% | 2022: -33.0% |
| 1999 | 102.0% | 2023: 53.8% |
Before the bubble burst in 2000, the Nasdaq 100 had an astronomical average return of 59% per year. Since 2019, it’s averaged 27%. Though above average, recent returns lack the extreme euphoria of the dot-com era.
Canary in the Coal Mine Risk? Low
Valuations
Investors pay $30 for every $1 of earnings today in the top 10 S&P 500 stocks, mostly tech-based. This premium is higher than the historical average P/E ratio of 20 (and the rest of the S&P 500 P/E of 17) but significantly lower than the dot-com peak, where P/E ratios approached 50.
Source: JPM Guide to the Markets
A comparison of P/E ratios among media darlings then and now reveals a stark difference as well. Nvidia’s current P/E ratio is 73. In contrast, Cisco’s 1999 peak of 472 highlights the excessive valuations that characterized the dot-com era.1
Canary in the Coal Mine Risk? Low
Earnings/Profitability
During the dot-com bubble, the top 10 S&P 500 stocks contributed 14-18% of the index’s earnings, which served as a low point over the past 30 years.
Source: JP Morgan Guide to the Markets
Recently, they’ve contributed over 20%, even during the 2022-23 bear market. This reflects tech companies’ increased profitability and innovation, justifying their high valuations.
Canary in the Coal Mine Risk? Low
Looking Ahead
Post-pandemic economic shifts and the AI boom have driven tech stocks sky-high, prompting some investors to fear another bubble. While market concentration is reminiscent of the dot-com era, the lack of extreme euphoria, more reasonable valuations, and more robust profitability suggest the recent tech rally isn’t necessarily the canary in the coal mine that some investors fear.
Whether the tech-fueled AI rally among the Magnificent 7 can continue is a different story.
Source: 1 https://www.linkedin.com/pulse/dot-com-bubble-versus-today-game-of-trades-as10f/
Castle Quote: “Just because your past didn’t turn out how you wanted it to, doesn’t mean your future can’t be better than you ever imagined.” – Unknown
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