ChartBrief 171 - Not Dot Com
I often look at sector composition trends for the S&P500, and one of the areas that is really standing out for me is the Information Technology sector (GICS classification). There's a lot of noise being made about tech stocks lately with the FAANG cohort probably getting the most attention. There's the temptation to draw parallels to the late 1990's dot com bubble, but looking at the data the differences are far greater and revealing than the similarities.
Valuation is a big issue, and taking the lens of the forward PE ratio, the tech sector as a whole is actually trading on par with the market vs a stark extreme during the heights of the dot com boom. Aside from relative value, absolute levels are notably lower too. But to me the most fascinating aspect is the changes in market cap representation, and more importantly the change in earnings representation.
Market cap representation (the total market cap of the tech sector vs the S&P 500 has climbed back towards the heights of the dot com mania, BUT earnings representation (the aggregate earnings of the tech sector vs the S&P500) has continued to trend higher, with the latest numbers at 23% vs 16% in mid-2000. Think about that for a second... the tech sector now accounts for about 1/4 of S&P500 earnings.... at the height of the dot com mania, the 'irrational exuberance', tech was the "new economy", the new paradigm, and various other buzzwords used to help justify the bubble in stocks, but now it really is the new economy.
Not Dot Com: in absolute or relative terms, tech sector valuations are a far cry from the dot com bubble.
Under the surface big changes have happened over the past 20 years: with the tech sector accounting for almost a quarter of S&P500 earnings, it really is the 'new economy'.
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