Stocks are in the midst of their best two years since the dot-com boom
Booming profits, soaring valuations.
Don’t want to jinx anything, but as we take the final turn of 2024, it’s worth stepping back to acknowledge — and if you want to get seasonal about it, be thankful for — the remarkable run the markets have been on.
The S&P 500 is now up 26.6% for the year which, if it finished there, would be its best year since 2019. That gain follows last year’s 24% advance for the blue chips. Put together, the S&P 500 is up nearly 57% since the end of 2022 — one of the best two-year runs on record.
The last time we saw such a surfeit was in the late 1990s, as the emergence of the internet set off a tech stock boom, that, on the surface, might look a bit like what we’re seeing today. (Before that, there were other good two-year stints in the mid 1970s and ’50s)
But in the ’90s, the stock market grew increasingly concentrated. Investor excitement at owning emerging tech giants like Cisco, Microsoft, and Oracle bulked up their market valuations massively, giving them larger and larger weights in market-cap-based indexes like the S&P 500.
Of course, that boom ended badly, as insane valuations for some of those companies — Oracle and Cisco in particular — came back to earth. The S&P fell 50% from its 2000 peak to its nadir in October 2002.
Today we have a somewhat similar scenario, with AI-related investor excitement creating new titans like Nvidia. And there’s certainly more than a bit of euphoric sentiment at play, as key valuation metrics show.
The difference is that the giants of today’s stock market are nowhere near as overvalued as they were in the 1990s. Market bulls argue that the massive profits companies like Apple, Microsoft, and Nvidia are producing insulates the market from the kind of collapse we saw in the ’90s.
Maybe, but Microsoft at its ’90s peak had a price-to-earnings multiple not dissimilar to Nvidia today, and that didn’t stop the stock from cratering by 60% during the dot-com bust.
Anyway, food for thought. And it’s not just us thinking this way. Speaking to Goldman Sachs recently, money manager Owen Lamont, of Acadian Asset Management, suggested the market is due for a period of underperformance after such a run.
“Many troubling measures suggest that the US stock market is overvalued today,” he said.
