A Blog by Jonathan Low


Jul 24, 2017

Tech Stocks Broke the Dotcom Market Value Record Last Week: Good News or...?

Tech stocks have become increasingly profitable, their performance exceeding that of the S&P 500.

The broader question is whether the economy's growing dependence on tech contains the seeds for a potential correction of equal weight. JL

Amrith Amkumar and Ben Eisen report in the Wall Street Journal:

The S&P 500 tech sector is trading at 23.2 times the past 12 months’ earnings. That is far below the 70.3 times the prior 12 months of earnings on March 27, 2000, when the tech sector peaked. The share of net income contributions to the S&P 500 from today’s tech sector is much higher than it was in the dot-com era. Tech stocks have become increasingly profitable, increasing profits by 18% in 2017 from a year earlier, topping the S&P’s 14% growth.
Tech stocks broke a nearly two-decade-old record.
The S&P 500’s information-technology sector ended the day at 992.29, closing above its previous all-time high of 988.49 set in March 2000 at the peak of the dot-com bubble. Tech stocks are by far the best-performing among the index’s 11 sectors this year, up 23% after posting their ninth consecutive day of gains on Wednesday.
Although it was down in June—the first month of losses for the sector this year—amid concerns that the group’s rapid run-up had left it susceptible to a selloff, tech stocks have regained their mojo in recent weeks.
Apple, the largest publicly traded company in the U.S., has posted its longest streak of consecutive gains since August 2014, while shares of other tech titans, including Facebook and Microsoft, closed at all-time highs. Google parent Alphabet, meanwhile, isn’t far from joining Apple as one of two companies with a market capitalization above $700 billion.
Those large tech stocks have carried the S&P 500 to new highs this year, attracting investors for their ability to increase earnings despite tepid economic growth.
Highflying semiconductor stocks that make the chips used in many technological products and other software shares have also outgained stocks in other sectors this year.
The tech-heavy Nasdaq Composite returned to setting fresh highs in the spring of 2015. On Tuesday, it set its first record since June 8 and reached another all-time high Wednesday, its 40th of 2017.
The S&P tech sector has been slower to reclaim record levels than the Nasdaq in part because it is missing some of the Nasdaq’s biggest gainers. Netflix and Amazon.com, though they are often associated with tech stocks and included in the Nasdaq, are classified by S&P as consumer-discretionary companies.
Netflix shares gained 14%, their largest one-day advance of the year, after the internet-streaming giant blew through its quarterly subscriber-growth estimate. They are up 50% this year, while Amazon is up 37%.
Meanwhile, the S&P tech sector includes some underperformers, such as International Business Machines, and Western Union, both down more than 10% this year. Neither are included in the Nasdaq.
Even as some investors have become concerned about the persistent rise in technology stocks this year, they are quick to note that there are major differences between technology stocks now and in the year 2000.
The S&P 500 tech sector is trading at 23.2 times the past 12 months’ earnings as of Tuesday’s close. While that is above the 22 times at which the broader S&P benchmark is trading, it’s far below the 70.3 times the prior 12 months of earnings on March 27, 2000, when the tech sector peaked, according to FactSet.
Tech stocks have become increasingly profitable in recent years, with the sector increasing profits by 18% in the first three months of 2017 from a year earlier, topping the S&P 500’s 14% growth.
Apple, the largest S&P 500 tech company by market cap, had profit of $11.03 billion in the most recent quarter of earnings. By contrast, Cisco Systems, the largest tech company by market cap in early 2000, earned less than a 10th of that in the three months through April 2000.
But some piece​s of the tech sector look strikingly similar. Microsoft, the second-largest tech company in March 2000, with a market cap of about $540 billion, is now the third-biggest company, with a market cap of about $570 billion, according to FactSet and S&P Dow Jones Indices.
With the largest tech firms set to report earnings in the next few weeks, tech stocks could go even higher. Weeks when quarterly earnings are being reported have traditionally driven a much higher percentage of stock-price gains for those highflying companies


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