Daily Times

Gazing into the cloudy crystal ball of recent stock market boom at Wall Street, one can never fell short of thinking of another dot-com bubble, when five years of euphoria in tech stocks in 1990s burst into a nearly 78% drop in stock prices over two years following the bubble burst. Ever since the Covid-19 pandemic has hit the global stock markets, which sent them crashing down- U.S stock markets touched the lowest point on March 23 amid widespread lockdowns due to the coronavirus pandemic: The S&P fell by up to 30%, the Nasdaq by up to 25% and the Dow by as much as 34% earlier this year. But stocks have so far had a strong start in June, building on back-to-back monthly gains. Both the Dow and S&P rose more than 4% in May, after rallying more than 11% in April. The S&P is now up 44% from its coronavirus crisis-level low on March 23, 2020- which is on track for its biggest August gain since 1984.

The major rally has been brought upon the back of technology stocks at major bourses around the world with US tech stocks in particular have been pushing the stock market to record highs, and now the sector has become more valuable than the entire European stock market for the first time in history, according to the latest research from Bank of America.

The striking Bull-run in tech sector comes in contrast to 2007 data, during which the European market was four times the size of the US tech sector, but in a recent note to its clients, Bank of America has revealed that the total market capitalization of US tech stocks reached $9.1 trillion, eclipsing that of the entire European market-including the UK and Switzerland, which is now valued at $8.9 trillion.

The sector has touched several extraordinary superlatives through the pandemic. The tech names fueled the U.S market’s rapid leap out of bearish territory and now host historically high investor crowding. Much of the high powered valuation is concentrated in the top tech giants which includes Microsoft and a basket of FAANG stocks; Facebook, Amazon, Apple, Netflix and Alphabet (formerly known as Google). Together the companies make up nearly 25% of the S&P 500 and are worth roughly $7.5 trillion. Apple alone is valued at over $2 trillion.

Apple, which now accounts for more than 7% of the index, rose nearly 60% this year till date, while the market value of the iPhone maker mushroomed to $2.1tn, lifting the company’s price-to-earnings ratio to 34 times, using its expected earnings over the next 12 months. Meanwhile, Amazon’s market cap touched about $1.7 trillion, Microsoft $1.6 trillion and Google parent Alphabet $1 trillion taking making the stocks in the Nasdaq Composite Index valued in aggregate at a wild, sky-high $17 trillion, which is equal to 90% of the entire US GDP, and over half the market value of all US traded stocks.

But, while the Big-cap tech giants continue to ride the wave of euphoria, most other areas of the market have lagged amid deepening recession and shabby economic indicators.

The subtle concentration of the boom in a particular sector during an episode of the pandemic hints towards another dot-com bubble brewing in the US which may burst sooner or later to create a global financial pandemic. The current tech-bubble calls for Warren Buffet’s warning about the dot-com bubble 20 years ago, when the Oracle of Omaha warned Berkshire Hathaway stockholders, regarding those gambling on sky-high internet stocks, and said “They know that overstaying the festivities-that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future-will eventually bring on pumpkins and mice.” As a warning against the madness of sky high stock prices, Buffett’s comments, of course, were on target, as the tech heavy Nasdaq composite index which peaked at 5,049 shortly before Buffett sent out his stockholder letter, promptly collapsed over the next 2½ years by 75%- with majority of publicly traded dotcom companies folded, and trillions of dollars of investment capital wiped out.

Before the dot-com bubble exploded in 2001, it rallied in 1990’s and was fed by cheap money, easy capital, market overconfidence, and pure speculation. Venture capitalists went berserk to find the next big score freely invested in any company with a “.com” after its name. Valuations were based on earnings and profits that would not occur for several years if the business model actually worked, and investors were all too willing to overlook traditional fundamentals. Companies that had yet to generate revenue, profits and, in some cases, a finished product, went to market with initial public offerings that saw their stock prices triple and quadruple in one day, creating a feeding frenzy for investors.

Although Buffet’s warnings raise alarms for investors, dot-com bubble may not happen in a near future, since markets are not dancing in a room “in which the clocks have no hands.” And even if things turn into pumpkins and mice, figuratively, it is very unlikely to happen in an instant at midnight. The infamous dot-com bubble of 1999-2000 took over 2 years to deflate fully, which indicates that the clocks didn’t just have hands back then, but buzzing alarms allowing investors to pick up the signs of bust. Moreover, the fundamentals of the tech sector have changed altogether since in the current scenario; technology now runs nearly every industry, which has a 40-80% growth while the industry’s higher valuations are more sustainable today as the revenue growth from tech is much higher than other industries.

The tech bubble may have raised alarms of a dot-com bubble repeat, but the recent stock markets pull back in March failed to identify clear winners and losers, since hyper-speculation resumed in haste to mushroom the tech sector. Quintessentially, the rally in the tech sector should further pick up the pace by the year end amidst series of political events in the U.S- including Presidential election in November and political uncertainty, raking-up further market stakes in tech companies – now considered as Safe haven stocks.