Tech Not A Repeat Of Dot-Com

I often look at sector composition trends for the S&P500, and one of the areas that is really standing out for me is the Information Technology sector (GICS classification). There’s a lot of noise being made about tech stocks lately with the FAANG cohort probably getting the most attention. There’s the temptation to draw parallels to the late 1990’s dot com bubble, but looking at the data the differences are far greater and revealing than the similarities.
Valuation is a big issue, and taking the lens of the forward PE ratio, the tech sector as a whole is actually trading on par with the market vs a stark extreme during the heights of the dot com boom. Aside from relative value, absolute levels are notably lower too. But to me the most fascinating aspect is the changes in market cap representation, and more importantly the change in earnings representation.

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Market cap representation (the total market cap of the tech sector vs the S&P 500 has climbed back towards the heights of the dot com mania, BUT earnings representation (the aggregate earnings of the tech sector vs the S&P500) has continued to trend higher, with the latest numbers at 23% vs 16% in mid-2000. Think about that for a second... the tech sector now accounts for about 1/4 of S&P500 earnings.... at the height of the dot com mania, the 'irrational exuberance', tech was the "new economy", the new paradigm, and various other buzzwords used to help justify the bubble in stocks, but now it really is the new economy.
Not Dot Com: in absolute or relative terms, tech sector valuations are a far cry from the dot com bubble.

Under the surface big changes have happened over the past 20 years: with the tech sector accounting for almost a quarter of S&P500 earnings, it really is the 'new economy'.

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Topdown Charts: "chart driven macro insights" Based in Queenstown, New Zealand, Topdown Charts brings you independent research and analysis on global macro themes and trends. Topdown Charts covers multiple economies, markets, and asset classes with a distinct chart-driven focus. We are not bound by technical or fundamental dogma, and instead look to leverage any relevant factor to capture the theme. As such, here you will find some posts that are purely technical strategy, some that just cover economics and data, and some posts that use multiple inputs to tell the story and identify the opportunities. Callum Thomas Head of Research Callum is the founder of Topdown Charts. He previously worked in investment strategy and asset allocation at AMP Capital in the Multi-Asset division. Callum has a passion for global macro investing and has developed strong research and analytical expertise across economies and asset classes. Callum's approach is to utilise a blend of factors to inform the macro view.