Investors have ridden an incredible recovery from the April 2 “Liberation Day” tariff surprises. Since the April 8 low, the Nasdaq Composite(NASDAQINDEX: ^IXIC) has appreciated an incredible 40%. And of course, that recovery has taken place amid a decade-long bull market in technology growth stocks.
It’s easy to understand why. Society is becoming more digital and automated. The last 10 years have seen the emergence of cloud computing, streaming video, digital advertising, the pandemic-era boom in electronic devices and work-from-home, all topped off by the introduction of generative artificial intelligence (AI) marked by the unveiling of ChatGPT in late 2022.
However, after a long tech bull market, technology growth stocks have reached a worrying valuation level relative to other stocks, and today’s relative overvaluation mirrors an infamous period in stock market history.
In several ways, technology stock performance and valuations are currently mirroring the extremes of the dot-com boom of the late 1990s. Unfortunately, we all know how that period ended, with a terrible “bust” that sent the Nasdaq tumbling three years in a row, eventually culminating in a 78% drawdown from the March 10, 2000, peak.
Technology innovation can be very exciting; however, that excitement often finds itself in the form of high valuations. According to data published on Charlie Bilello’s State of the Markets blog, the technology sector’s recent outperformance has now exceeded that of the height of the dot-com bubble:
Graph showing tech sector performance relative to S&P 500 since 1990.
The relative outperformance isn’t the only mirror to the dot-com era. Back then, tech stocks also became very large, leading to an outperformance of large stocks relative to small stocks. Similarly, tech stocks are often growth stocks with high multiples, reflecting enthusiasm over their future prospects. This is in contrast to value stocks, which trade at low multiples, usually due to their more modest growth prospects.
As you can see below, the outperformance of large stocks to small stocks, as well as growth stocks to value stocks, is at highs last seen during the dot-com boom.
Given that higher-valued tech stocks now make up a larger portion of the index, the Schiller price-to-earnings (P/E) ratio, which adjusts for cyclicality in earnings over 10 years, while not quite at the levels of 1999, has crept up to the highest level since 1999, roughly matching the level from 2021:
As we all know, 2022 was also a terrible year for tech stocks. While it didn’t see a multiyear crash akin to the dot-com bust, 2022 saw the Nasdaq decline 33.1% on the year. Of course, at the end of 2022, ChatGPT came out, somewhat saving the tech sector as the AI revolution kicked off.
Thus, when compared to history, tech stocks are at worrying levels. Given the similarities to the 1999 dot-com bubble and the 2021 pandemic bubble, some may think it’s time to panic and sell; however, there are also a few counter-narratives to consider.
The first is that, unlike in 1999, today’s technology giants are mostly truly diversified, cash-rich behemoths that account for a greater and greater percentage of today’s gross domestic product (GDP). While the late 1990s certainly had its leaders — including Microsoft(NASDAQ: MSFT), the only market leader that is in the same position today as then — they weren’t really anything like today’s tech giants, with robust cloud businesses, global scale, diversified income streams, and tremendous amounts of cash.
While market concentration in the top three weightings tends to occur before market downturns, index weighting concentration appears to be somewhat of a long-term trend now, increasing beyond prior highs in 1999 and 2008 since 2019.
Image source: Charlie Bilello State of the Markets blog.
Thus, it seems a higher weighting of the “Magnificent Seven” stocks could be a feature of today’s economy, rather than an aberration.
While it’s true that some of today’s large companies are overvalued, given their underlying strength and resilience, it’s perhaps not abnormal for them to garner higher-than-normal valuation multiples.
It’s important to know that while taking note of market levels is important, it is extremely difficult to time market downturns. Famed investor Peter Lynch once said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
So, one shouldn’t abandon one’s long-term investing plan just because overall market levels may be frothy. That being said, if you need a certain amount of cash in the next one to two years, it may be a good idea to keep that money in cash or Treasury bills until then, rather than the stock market.
Furthermore, if you have a regular, methodical investing plan, stick to it. But if you are consistently adding to your portfolio every month or quarter, you may want to look at small caps, non-tech sectors, and value stocks today, rather than adding to large technology companies.
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Tech giants Apple and Amazon delivered better-than-expected quarterly earnings this week, showcasing resilient growth despite ongoing challenges from tariffs and intensifying competition in artificial intelligence. Both companies beat Wall Street estimates but revealed underlying concerns that tempered investor enthusiasm.
Apple’s Record-Breaking Quarter
Apple reported exceptional third-quarter fiscal 2025 results on Thursday, with revenue surging 10% year-over-year to $94 billion, marking the company’s largest quarterly revenue growth since December 2021. The iPhone maker posted earnings per share of $1.57, significantly exceeding analysts’ expectations of $1.43.
“Today Apple is proud to report a June quarter revenue record with double-digit growth in iPhone, Mac, and Services and growth around the world, in every geographic segment,” said CEO Tim Cook during the earnings call.
China Sales: $15.37 billion (up 4% YoY), beating expectations
Gross Margin: 46.5% vs. 45.9% expected
The standout performer was the iPhone business, with Cook revealing that the iPhone 16 models showed “strong double-digit” growth compared to their predecessors. The company also reached a milestone, shipping its 3 billionth iPhone during the quarter.
However, not all product lines performed equally well. iPad revenue fell to $6.58 billion, missing expectations of $7.24 billion, while the wearables division also saw a year-over-year decline to $7.40 billion.
Amazon’s Mixed Results Spark Concerns
Amazon reported second-quarter results that exceeded expectations but disappointed investors with lighter-than-expected operating income guidance. The e-commerce giant posted earnings per share of $1.68, beating the $1.33 estimate, while revenue reached $167.7 billion, surpassing the $162.09 billion forecast.
Despite the strong numbers, Amazon shares slid more than 7% in after-hours trading as the company provided cautious guidance for the third quarter, projecting operating income between $15.5 billion and $20 billion. CEO Andy Jassy attempted to reassure investors about AWS’s “pretty significant” leadership position in cloud computing.
AI Investments and Competition
Both companies are heavily investing in artificial intelligence capabilities. Amazon has committed to spending up to $100 billion this year on AI infrastructure, including data centers and software development. Meanwhile, Apple faces criticism for its slower AI rollout compared to competitors.
Cook hinted at potential acquisitions, stating Apple is “open to M&A that accelerates our roadmap” and confirmed the company would “significantly grow” its AI investments. Industry analysts have suggested Apple should consider acquiring AI startups to catch up with rivals.
Tariff Impact and Future Outlook
Tariff concerns loomed large in both earnings reports. Apple incurred $800 million in tariff costs during Q3, lower than its initial $900 million estimate. Looking ahead, Cook warned that tariff costs could reach $1.1 billion in the September quarter if policies remain unchanged.
Amazon similarly cited “tariff and trade policies” and “recessionary fears” as factors that could affect future guidance. However, Jassy noted that tariffs haven’t significantly dented demand or driven up prices so far this year.
Looking Ahead
For the upcoming quarter, Apple expects mid- to high-single-digit revenue growth with gross margins between 46% and 47%, including tariff impacts. The company’s services segment faces a potential $20 billion threat if a federal judge rules against Google’s exclusivity deals in an ongoing antitrust case.
Amazon forecast third-quarter revenue between $174 billion and $179.5 billion, representing 10% to 13% year-over-year growth. The company’s cloud division, while still growing, showed signs of deceleration with three consecutive quarters of revenue misses.
Both tech giants demonstrate resilience in navigating a complex landscape of regulatory challenges, AI competition, and economic uncertainty. However, investors remain cautious about the sustainability of growth amid these headwinds, particularly as the companies face increasing pressure to deliver returns on their massive AI investments.
(Bloomberg) — Stocks rallied, tracking gains in Asian markets as a tech-fueled rebound spread globally.
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Europe’s Stoxx 600 index jumped 1.2%, the most since mid-August, led by gains in the technology sector. Futures for the S&P 500 were up 0.2%. Treasuries were steady and the dollar was flat. The MSCI Asia Pacific Index climbed the most in almost a month, boosted by gains in the tech-heavy markets of Japan, South Korea and Taiwan.
Risk appetite has returned after the world’s largest technology companies spurred a stock-market bounce on Wall Street on Wednesday. Focus is also on the path for interest rates, with the European Central Bank poised to cut again on Thursday. US inflation data for August supported bets for a Federal Reserve rate cut next week, but fueled speculation officials will move gradually.
Traders have swung between optimism that the Fed will guide the US economy to a soft landing and fear that the central bank has left it too late to cut rates. While swaps have now priced in a 25 basis point rate reduction next week, debate over the path for further reductions continues, and some investors say markets have overpriced expectations.
“Stocks will probably rally more with a 25 bps cut than 50,” because the latter will signal weaker growth, Timothy Moe, chief Asia Pacific equity strategist at Goldman Sachs Group Inc., said on Bloomberg TV.
In corporate news, OpenAI is in talks to raise $6.5 billion from investors at a valuation of $150 billion, according to people familiar with the situation. Nvidia Corp. Chief Executive Officer Jensen Huang said the limited supply of their products has frustrated some customers and raised tensions.
Alimentation Couche-Tard Inc. is discussing improving its takeover proposal for Seven & i Holdings Co. with the goal of convincing the Japanese convenience store operator to start engaging in discussions, people with knowledge of the matter said.
In Japan, the Nikkei index halted a seven-day losing streak as the US inflation print pulled the yen down from its strongest level against the dollar since December. A region-wide gauge of tech stocks rose more than 3% after Nvidia jumped 8.2% overnight, while Taiwan Semiconductor Manufacturing Co. was among top gainers on the regional index.
Oil extended gains from Wednesday as Hurricane Francine ripped through key oil-producing zones in the Gulf of Mexico, prompting traders to cover bearish bets. Gold traded above $2,515 per ounce.
Key events this week:
ECB rate decision, Thursday
US initial jobless claims, PPI, Thursday
Eurozone industrial production, Friday
Japan industrial production, Friday
U. Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
The Stoxx Europe 600 rose 1.2% as of 8:11 a.m. London time
S&P 500 futures rose 0.1%
Nasdaq 100 futures rose 0.2%
Futures on the Dow Jones Industrial Average rose 0.1%
The MSCI Asia Pacific Index rose 1.5%
The MSCI Emerging Markets Index rose 1.3%
Currencies
The Bloomberg Dollar Spot Index was little changed
The euro was little changed at $1.1010
The Japanese yen fell 0.3% to 142.79 per dollar
The offshore yuan was little changed at 7.1282 per dollar
The British pound was little changed at $1.3045
Cryptocurrencies
Bitcoin rose 0.8% to $57,932.51
Ether rose 0.5% to $2,359.36
Bonds
The yield on 10-year Treasuries advanced two basis points to 3.67%
Germany’s 10-year yield advanced two basis points to 2.13%
Britain’s 10-year yield advanced two basis points to 3.78%
Commodities
Brent crude rose 1.4% to $71.59 a barrel
Spot gold rose 0.1% to $2,515.43 an ounce
This story was produced with the assistance of Bloomberg Automation.
