Wall Street Debates Whether Tech Valuations Resemble Late 1990s

Wall Street strategists are weighing whether today’s technology-stock valuations and market breadth resemble conditions seen in the late 1990s before the dot-com bust. The debate has sharpened as a handful of large tech and semiconductor names lead gains while many other stocks lag. Several technical indicators are flashing extremes that have appeared only rarely in recent decades.

One measure cited by analysts is the Philadelphia Semiconductor Index (SOX), which has reached what some describe as overbought levels relative to its 200-day moving average only twice before: in early 2000 and in 1995. In early 2000, that reading coincided with a market peak. In 1995, semiconductors later suffered their own bear market even as broader indexes continued higher.

Market breadth has also drawn attention. The S&P 500 recently hit a record high while a significant number of its constituent stocks posted 52-week lows, a pattern strategists have said has occurred around major market tops, including in the late 1990s.

Thin market breadth rekindles dot-com comparisons

Bespoke Investment Group noted that since 1996 the only other period when the S&P 500 was at record highs with fewer than 60% of stocks above their 50- and 200-day moving averages ran from late 1998 to early 2000. That span included a powerful surge in technology shares. The Nasdaq Composite more than tripled between autumn 1998 and its March 2000 peak.

Some analysts argue the historical comparisons are imperfect because the market’s leadership looks different today. Bank of America’s tech-equity-trading desk said the largest current technology companies are heavy capital-expenditure spenders and network builders, unlike many of the businesses that dominated investor enthusiasm in the 1990s.

Valuations and sentiment show a different backdrop

Valuation measures have moved higher, but the broader backdrop does not mirror the late-1990s peak in every respect. The S&P 500’s forward earnings multiple has recovered to just over 21, after falling from 23 in late October to near 19 at the March 30 correction low.

Analysts also pointed to consumer confidence as a partial contrast with the dot-com era. Confidence levels have improved, but remain about half the levels seen before the March 2000 market peak, according to the figures cited in the report.

Investors will be watching whether breadth improves as stocks trade near record levels, or whether leadership continues to narrow around a small group of technology and semiconductor shares.