US Tech Stock valuations are echoing two major moments of the past two decades. And there’s three key points this sounds on markets now.
Firstly… n.b. I have used the broader definition of TMT — Tech, Media, Comms …because tech stocks don’t just sit in the tech sector anymore these days (you can’t hide from my analytical gaze!). Secondly, that combined PE ratio is the average of the PE10, trailing PE, and forward PE (to amplify signal vs noise and overcome some of the weaknesses of each individual valuation indicator).
But more to the key points:
US TMT stocks are now as expensive as they were during the 2021 peak, and you had to go back to the 2000 dot-com bubble to find higher levels.
2021 was a stimulus fueled frenzy
2000 was a classic new-paradigm bubble
Interestingly, though the gap between tech vs non-tech is now *wider* than 2021.
You could argue that non-tech is cheap vs tech, and maybe there is scope for catch up, but level-wise vs history non-tech is non-cheap.
The other argument would be that tech has further to fall vs non-tech in the event of a market downturn.
There is good reason for this valuation extreme: tech earnings have outpaced non-tech and done most of the heavy lifting on index-level EPS growth.
(but all bubbles and valuation extremes find their beginnings in good reasons, before taking it all a bit to far into infinite extrapolation)
All of this basically reflects expectations of continued-unchecked-exponential growth for US tech stocks… And as I’ve said before, if you’re priced for perfection you better get perfection – and you better not raise any doubts or start to waver or things could unravel pretty quickly.