A Record-Setting Week for Stocks
Stocks around the world rewrote the record books last week. In the United States, the Nasdaq Composite Index eclipsed its 2000 peak, advancing 3.26% to close the week at 5,092. In Japan, the Nikkei Index climbed above 20,000 for the first time in 15 years, while China's equity market continues to defy gravity. Meanwhile, the S&P 500 Index rose 1.72% to 2,117 and the Dow Jones Industrial Average was up 1.42% to 18,080. As for bonds, the yield on the 10-year Treasury rose from 1.87% to 1.91% as its price correspondingly fell.
Such milestones are just numbers, but they do offer an opportunity to assess where we are. Our take is that U.S. technology stocks are not in a bubble, unlike in 2000. However, we would exercise some caution, or at least selectivity, particularly with respect to China, where the A-Share market appears increasingly frothy.
2015 Is Not Y2K
Last week, U.S. stocks were once again aided by merger-and-acquisition activity, with Teva Pharmaceuticals making an unsolicited $40 billion bid to take over Mylan. "Good enough" earnings also provided a measure of support. While IBM and Facebook missed analysts' expectations, partly due to the dollar's strength, Caterpillar, Amazon, Microsoft and Morgan Stanley all posted strong numbers.
The rally in stocks that has pushed the Nasdaq Composite to new highs is seen by some as a sign of another tech bubble. In reality, however, valuations in the sector look more sober today than back in 2000.
The current multiple on the sector is roughly 19.5 times trailing earnings, only about 5% higher than the broader market and not much changed over the past year. In contrast, in March of 2000, the U.S. technology sector was trading at over 72 times earnings, more than double the market's valuation. The year leading up to the bursting of the tech bubble in 2000 was marked by relentless multiple expansion, a one-year climb of more than 50%.
Another key differentiator today: The tech sector represents a more modest portion of the overall stock market. At their peak, technology stocks accounted for roughly 30% of total U.S. market capitalization; today, the weight is around 20%. Technology actually is once again the largest weighting in the S&P 500, but it is far less dominant than it was back in 2000. Still, while we continue to favor the technology sector, we would focus on the mature tech companies with real earnings.