5 Ways Today's Market Resembles The Dot-Com Bubble

Despite a global pandemic and the most severe global economic recession since World War II, the Nasdaq and many popular tech stocks are trading at all-time highs. It’s understandable for investors to be skeptical of tech stock valuations given how severely many were burned during the dot-com bubble back in 2000.

Tech Bubble 2.0? Unfortunately, Sevens Report Research founder Tom Essaye said Friday there are at least five similarities between today’s market and the dot-com bubble:

1. Essaye said the sideways trend in the yield curve in the past year closely resembles the yield curve’s behavior in the late 1990s prior to the bursting of the tech bubble. The yield on 10-year Treasury bonds has started to creep higher this week on inflation concerns following trillions of dollars of Federal Reserve stimulus spending.
2. Stock market leadership is very thin, much like it was in 2000. The S&P 500 and Nasdaq may be trading near all-time highs, but Apple, Inc. AAPL, Microsoft Corporation MSFT, Amazon.com, Inc. AMZN, Alphabet, Inc. GOOG GOOGL and Facebook, Inc. FB now account for a whopping 23% of the entire market cap of the S&P 500.
3. Stock valuations are extremely high. The S&P is currently trading at about 20 times projected 2021 earnings, about a 25% premium to its historical average forward earnings multiple of 16. In 2000, the S&P 500 forward earnings multiple peaked at around 24.
4. Retail investors are flooding into the market. The rise of Robinhood traders and other first-time investors closely resembles the surge in retail traders during the dot-com bubble era. However, Essaye said price action in most stocks is not yet to that “euphoric” stage that typically coincides with a market top.
5. The stage is set for rising inflation. U.S. inflation has been nonexistent since the peak of the housing bubble back in 2007, but the Fed’s willingness to print unlimited cash to support the economy has gold prices soaring and many economists concerned about the fallout. Inflation rates peaked at 3.7% back in 2000, but Essaye said any spike to above 3% would likely get the Fed’s attention and could trigger interest rate hikes. Interest rates peaked at 6.5% back in 2000 just prior to the bubble bursting.

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How To Play It: The good news for investors is that Essaye said there’s no reason to panic just yet based on current market conditions.

“Using the time period of 1998-2000 as a general guideline, stocks pulled back by over 20% into the end of 1998 (similar to the Q1’20 selloff) only to recover to new highs and surpass the old records by 30% into the 2000 highs,” Essaye said.

If the S&P 500 follows that 1998 blueprint, it could surpass the 4,000 level before the bubble bursts.

Benzinga’s Take: If Essaye’s comparison to the 1998 to 2000 period is correct, investors are right to be concerned about a potential sell-off that could result in 10 to 15 years of underperformance by top tech stocks. However, it may be way too early to sell the SPDR S&P 500 ETF Trust SPY at this point if there is an additional 30% upside ahead in the near-term.

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