The Tech Boom: Sustainable Growth or 1990s-Era Bubble?

The incredible run of the stock market has led to many comparisons to the market performance of the late 1990s. There are many similarities, including a transformative technology central to both market and economic growth (then the internet, today artificial intelligence). We believe AI marks another in a long line of productivity-enhancing technologies reaching as far back, if not farther, than the agricultural revolution – though, like the dot-com boom and bust of the 2000s, the path to widespread usage and efficiency gains may be bumpier than investors would prefer.

While there are many similarities, we see a few key differences between today’s market and that of the 1990s.

Like the late 1990s, today’s market is historically concentrated in the country’s biggest tech companies. The S&P 500’s 10 largest stocks (i.e., just 2% of its companies) account for 35% of its total value, exceeding the prior peak of 26% set in 1999. Unlike the late 1990s, however, today’s “Big Tech” conglomerate is both mature and quite profitable – in stark contrast to the less sound “internet darlings” of the late 1990s.

Said another way, today’s top 10 are the top 10 for a good reason – the fundamentals back them up.

There’s also a valuation comparison to be made. At their core, stocks represent ownership shares of a company – but what an investor should pay for that opportunity is up for debate. Investors often use simple heuristics like “price-to-earnings” to judge whether a stock looks expensive or cheap – the higher the price-to-earnings ratio, the more investors are paying for the promise of greater profitability down the line. Both the late 1990s and today saw the stock market rising to historically high P/E ratios – a sign of optimism that the underlying companies could deliver future earnings growth. But again, there’s a stark difference between then and now: The P/E ratios in the late 1990s dwarf today’s levels, with the most expensive stocks reaching nosebleed-level valuations. This doesn’t mean every valuation today is justified – we might argue the market’s risk/reward profile at current levels skews to the downside. But there is a material difference between today’s “stretched” valuation and the late-1990s “insanity.”

While the Nasdaq’s current streak (orange) resemble its late-‘90s run (purple), the market would need to skyrocket from here to match the blowoff top of the 1999–2000 dot-com bubble.

Speaking of insanity, investor sentiment seems far more muted today than during the dot-com bubble. This squares with the point made above: If investors are willing to pay higher prices for lower earnings, they must be even more excited about a company’s future prospects. In the late 1990s, the country was in the grips of a stock trading mania: New internet companies were going public regularly, and money was flowing into stocks and mutual funds at a far greater pace than today. There simply isn’t the investor interest, mergers and acquisitions activity, or overall froth today to signal a broad-based euphoria.

In terms of investor sentiment, the closest parallel to the late 1990s might not be today’s AI moment, but the meme stock / SPAC / crypto craze of early 2021.

Of course, this doesn’t mean the market will evade the volatility or big selloffs from the late-‘90s. We’ve already seen the NASDAQ fall over 35% in 2022 when the Fed hiked interest rates to combat inflation. Plus the late 1990s had some economic advantages compared to today: Thanks to an enormous peace dividend after the fall of the Berlin Wall, the U.S. actually ran budget surpluses, and the price of oil fell to a mere $11 in 1998. But on the whole, we see little evidence of a bull market top forming – while we acknowledge the close comparisons to the late 1990s, we feel the economic cycle and bull market may yet have room to run before conditions must be reconsidered.