A sharp sell-off in high-growth tech stocks has pulled the tech-heavy Nasdaq index down by around 7% from its March 5 high.
During the period, Netflix is down 27%, Amazon.com is down 14%, Facebook is down 14%, and Google is down 12%.
Meanwhile the S&P 500 is down by 2%.
“One reason for the recent sell-off in the US stock market appears to be a concern that valuations in the technology sector are stretched,” notes John Higgins of Capital Economics.
But because we’re all human, we can’t help but at least wonder if this is the beginning of something much worse.
“Given the rout in technology shares after the bursting of the dot com bubble, it would not be surprising if some investors felt they were experiencing déjà vu. But comparisons with the early part of this century are misplaced. The technology sector is much less overvalued than it was back then.”
Higgins included the chart comparing the valuations of various industries during the two periods.
“Consider that in March 2000 — the month in which technology shares peaked — the price/estimated operating earnings ratio of the S&P 500 biotech index was 46, more than twice its level of 20 or so today,” he said. “And the valuation of the information technology sector on this metric was nearly four times as high.”
To be clear, Higgins and Capital Economics are no raging bulls on the market. Their S&P 500 target through 2015 is 1,900.
However, their point is that there are probably other things to be more concerned about than stretched valuations.
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