Here's why one expert says scorching-hot tech stocks are far less vulnerable than they were during the dot-com bubble — and why they can keep climbing
- Tech stocks’ rally from mid-March lows is fueling concerns of another market bubble, but history shows the shares are fairly valued, James Paulsen, chief investment strategist at The Leuthold Group, said.
- Though tech companies now comprise roughly 27% of the S&P 500’s market cap, their sales contribute to a greater share of nominal GDP than they did in the dot-com era, Paulsen said.
- While the early 2000s saw a “true bubble — where asset prices rose much faster than underlying fundamentals,” today’s tech names drive more economic growth and still aren’t reaching past market weightings, he added.
- Tech stocks’ market cap relative to economic contribution also shows stock prices sitting at levels seen after the dot-com bubble burst, the strategist found.
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Today’s rallying tech stocks won’t repeat the 2000 “tech-bubble” tumble because they aren’t forming a true bubble at all, James Paulsen, chief investment strategist at The Leuthold Group, said.
The tech sector drove the bulk of the stock market’s upswing from mid-March lows and now comprises roughly 27% of the S&P 500’s market cap. Several analysts have highlighted the swelling concentration as a red flag for investors, forecasting a correction similar to that seen when the dot-com bubble burst.
Paulsen doesn’t share their concerns, and instead sees one long-term trend protecting tech stocks from a burst-bubble downturn. Though tech companies are contributing more to the S&P 500’s gain, their sales make up a larger proportion of the US’s nominal gross domestic product than they did in 2000.
Two decades ago, tech sales as a proportion of GDP peaked at 8%, yet the companies’ contribution to S&P 500 market cap soared to 34% from 8%. Today, such sales make up 17% of GDP and the tech sector’s proportion of S&P 500 market cap sits at 27%.
“The dot-com bubble was a true bubble — where asset prices rose much faster than underlying fundamentals,” Paulsen said.
The Leuthold Group
The tech rally is further backed up by tech companies’ outperformance through the pandemic. Second-quarter sales from tech firms held their ground far better than the 10% decline in GDP estimated by the Federal Reserve Bank of Atlanta, the strategist said.
Some metrics suggest tech stocks have plenty of room to run. Paulsen found that, when adjusting the tech sector’s market cap for their economic contribution, the shares are fairly valued. Their valuations crumbled in the early 1990s and from 2012 to 2018, but the gauge now sits just above the levels seen right before the financial crisis. For their weighting to return to dot-com-era levels, it would need to more than double.
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Tech stocks have leaped the most of any sector from their coronavirus-induced lows, but judging by their contribution to economic growth and relative market weighting, investors need not fear another bubble-bursting, Paulsen said.
“Today, compared to their current fundamental economic contribution, technology stocks are no longer extraordinarily cheap, but neither are they priced as excessively as they were in 2000,” he said.
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