With stock prices surging in the biotech and internet sectors, some worrywarts can’t help but freak out about the possibility that we’re reliving the bubble of the dotcom era.
It certainly didn’t help when Federal Reserve Chair Janet Yellen warned that valuation metrics in these sectors “appear substantially stretched.”
In a 13-page note titled “Blowing and Bursting Bubbles,” Citi’s Tobias Levkovich offers a good discussion of past bubble cycles.
But one chart from his August 1 offered some eyeopening perspective. Here’s his comment for context:
In the late 1990s, the TMT bubble expanded, with the combination of the IT sector along with Media stocks and the Telecommunications Services sector culminating with a near 40% composition of the S&P 500 market cap entering 2000. Valuations were through the roof within Nasdaq relative to the S&P 500 (see Figure 1) indeed, the Nasdaq 100 was trading at more than 100x forward EPS in late 1999. The notions of a New Economy unburdened by typical economic cycles became the rage and risk premiums collapsed to near nothing.
That was then.
Today, valuations in the Nasdaq are nowhere near those literally off-the-chart levels.
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