Stocktake: Bubble talk premature despite frothy prices
Talk of a tech bubble is everywhere at the moment. The Nasdaq is above 4,000 for the first time in 13 years; social media stocks like Twitter, LinkedIn and Facebook are at sky-high valuations; Snapchat has reportedly turned down a $3 billion takeover offer despite an unproven business model and no revenues.
And that’s about it, really. Comparisons with the dotcom era are as ludicrous as they are common. Yes, social media valuations defy logic, and some tech stocks like Amazon are expensive. Others, like Apple, Microsoft, Cisco and Intel, sit on a mountain of cash and trade at 11-12 times estimated earnings.
It took almost a year for the Nasdaq to go from 3,000 to 4,000. In November 1999, it went from 3,000 to 4,000 in a month, topping out above 5,000 in March 2000.
The tech sector accounted for 13 per cent of the S&P 500 in early 1998; by March 2000 its sector weighting had soared to 33 per cent. Today it accounts for 17.6 per cent of the index, compared to 17.8 per cent at the start of the bull market in March 2009.
This year the Nasdaq 100 is up 32 per cent, not much more than the S&P 500’s 26 per cent return.
Technology may be overbought and it may be overvalued, but a bubble? No chance.
S&P 500 gain not extraordinary
Bubble talk is not confined to tech. A survey of Bloomberg subscribers found 20 per cent thought global stocks are in a bubble; another 45 per cent thought they were near bubble levels. This is peculiar – although the MSCI World Index has risen 21 per cent this year it remains near historic valuation levels.
The S&P 500 is clearly overvalued, having soared by 170 per cent since March 2009, but bubble talk is a bit wild. This year’s 26 per cent gain, though the highest since 1998, is not extraordinary.
Over the last 86 years the S&P 500 has risen by at least 25 per cent on 24 occasions. Annual gains of 20 to 25 per cent have been the second most frequent outcome for the index since 1927.
Marketwatch’s Mark Hulbert notes that in December 1999 the index had a price-earnings ratio of 29.7 (19.1 today); a cyclically adjusted price/earnings ratio of 44.2 (24.4 today); a price/book ratio of 5.1 (2.6 today); and a price/sales ratio of 2.4 (1.6 today). Valuations are high, not stratospheric.
Double-digit gains have followed returns of 25%
Whether US stocks eventually hit bubble levels is another matter. Jeremy Grantham recently warned that, although the S&P 500 is well above fair value, he would not be surprised if it rose another 20 to 30 per cent in the next year or two, followed by the third major crash since 2000.