Tech Sector: Bubble Or Not?

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Seventeen and a half years ago, on April 1, 2000, we published a piece entitled, “Will the NASDAQ sell-off become a crash?” We have now retrieved that piece from our archives and posted it on our website. Here is the link to the original piece.

In preparing that piece in 1999-2000, we evaluated the stock market at the time and made a theoretical calculation in which we merged two companies, Cisco (NASDAQ:CSCO) and Microsoft (NASDAQ:MSFT). We assumed that their reported earnings were accurate. We found that the two companies together had reported earnings of $10 billion, and their merged theoretical market valuation amounted to $1 trillion. Our conclusion at the time was fairly straightforward: There was nothing wrong with either company. Both Cisco and Microsoft were fine, large, developing, worldwide leaders in the Technology sector. The stock price, however, was wrong. At 100 times earnings, the price of the theoretically merged company’s shares was not justified by any valuation technique. The combined GDP of all countries in the world was estimated at $30 trillion at that time.

We concluded in our piece that the NASDAQ at 5,000 was setting up for a crash. The fourth page of that 18-year-old piece measures the value of Cisco against a list of companies (that list included Apple (NASDAQ:AAPL)). Take a look at that list, and you will see that Apple had a market cap of about $23 billion and Cisco had a market cap of over $500 billion.

Eighteen years ago we forecast that the NASDAQ 5,000 would lose over two-thirds of its value before the crash and the sell-off ran their full course. Never did we think that the result would be a loss of 80% of its value from peak to trough.

Today, we hear a constant litany about technology stocks, and we are questioned about the current time as a replay of the bubble that occurred almost two decades ago. Acronyms like FANG and FAANMG and others are used to aggregate the large-cap tech stocks like Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Alphabet (Google) (NASDAQ:GOOG) (NASDAQ:GOOGL), Apple, and others. The collective weight of the Tech sector today is about 25% of the total stock market weight of US stocks. And the value of the entire US stock market in relation to the US GDP is now at the highest level ever, with the sole exception being the tech stock bubble period of 1999-2000. By the way, the 25% weight threshold has marked the top or close to the top of every sector’s peak, not just Technology’s.