This is The Takeaway from today’s Morning Brief, which you can sign up to receive in your inbox every morning along with:
Tech’s back at it.
It wasn’t that long ago that fears of a Chinese startup’s AI advancements channeled a mix of anxieties about overblown tech stocks. Along with a trade war. Several storylines — from reckless AI spending to sky-high valuations — folded neatly into an argument that maybe this was the one step back after the two steps forward over the past couple of years.
But after a bout of plunging stock prices, Big Tech has mounted a comeback and then some. The off-the-charts excitement now that a suite of catalysts — trade war, Iran/Israel, and Fed cut hopes — have been put to the side is palpable.
Right now, as DataTrek’s Nicholas Colas put it, “a bullish call on US large caps therefore requires believing that we can get to 1999-type valuations.”
It’s a charged date to throw into the mix, invoking the exuberance that led up to the dot-com bubble. But as Colas noted, there are key differences for investors to consider even if stocks are partying like it’s 1999.
At the peak of the internet bubble, the benchmark S&P 500 (^GSPC) traded at more than 24 times forward year earnings estimates. As Colas noted, the index currently trades at 23 times this year’s numbers and 20.3 times next year’s consensus estimate. To see the bullish calls like the 10% gain from current levels we just got from BMO’s Brian Belski, the multiple, depending on exactly how quarterly results go, could surpass that level. (Belski’s model has a 24.4x ratio.)
That comparison may feel scary and bubbly, but there are a lot of reasons to be an optimist these days, despite the swirling negative catalysts and the lingering sense that trouble is around the corner. As Fed Chair Jerome Powell said last week, the “US economy has defied all kinds of forecasts for it to weaken.”
Of course, plenty of bets won’t pan out. Some estimates say that a huge portion of AI projects will vanish in a few years, and it’d be normal for emerging tech to have winners and losers. And as for the winners, well, you already know their names. They’re powering the S&P 500.
Colas noted that this year has a much more positive setup than 1999, with rate cuts on the horizon and greater S&P tech exposure. The historic frames are different. So are the underlying technologies driving growth and producing actual profits, and reasons more will follow.
