Why today’s bull market is not a dot-com-bubble remake, investment chief says

Feb 28, 2024
  • Worries about another dot-com bubble bust overlook key differences, Julius Baer’s chief investment officer wrote in the Financial Times.
  • In 1999, the Federal Reserve was loosening policy, effectively injecting liquidity into the rally, said Yves Bonzon.
  • He also noted that today’s valuations are instead supported by quality earnings and record free cash flow.

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Warnings of a dot-com bubble rerun overlook key differences between that era and today’s bull market, Julius Baer’s chief investment officer wrote for the wrote for the Financial Times.

Unlike 1999, the ongoing rally isn’t motivated by loose monetary policy, while equity valuations stand well below those seen at the turn of the century, Yves Bonzon said. 

“It is true that from a technical point of view, the positioning of investors looks stretched and pockets of the US equity market are reaching overbought territory,” he said. “However, observers making comparisons with the dot-com bubble are barking up the wrong tree.”

By that year, the Federal Reserve had eased policy by 75 basis points, in response to an Asian currency devaluation crisis. In turn, that spurred the dot-com spike, providing markets with an ample liquidity injection.

In comparison, today’s rally follows on the back of the most aggressive tightening campaign in the Fed’s history, and is not the result of excessive money supply, Bonzon wrote. Since March 2022, the fed funds rate surged 525 basis points, and US M2 supply is still contracting at a 2.3% year-on-year rate.

In such an environment, not only are investors less compelled to pursue riskier investments, Bonzon added that it’s difficult for corporations to artificially inflate their earnings. 

Therefore, price uneasiness that stems from the surge in today’s top mega-cap stocks misses the point, as this rally is led by strong earnings and a record level of cash generated after expenditures.

Metrics such as forward price-to-earnings ratios show that dot-com stocks were over twice as costly when compared with the top seven stocks of today’s S&P 500. There is no evidence of a bubble in price-to-earnings ratios, Bonzon said.

“Investors who conclude that US large-cap equities are overvalued are implicitly discounting that free-cash-flow metrics, which have improved sharply in recent decades, will return to their long-term weaker mean,” he wrote. This wouldn’t happen without a complete reversal in globalization and US corporate tax rates.

“Overall, the stock market resilience in the face of normalised interest rates points to the outstanding quality of the current equity market returns,” he wrote, and added: “This is not a remake of 1999.”

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