BANK OF AMERICA: 'This is not your parents' tech bubble'

Remember cheap Silicon Valley leases? Picture: Getty Images

For stock enthusiasts, drawing parallels between the current market and the dotcom bubble is a pretty common activity.

But Bank of America Merrill Lynch doesn’t buy into those comparisons at all.

In their mind, the tech-driven stock rally is far more stable this time around — and the reason stretches far beyond valuation.

“This is not your parents’ tech bubble,” BAML chief US equity and quantitative strategist Savita Subramanian wrote in a client note.

The firm cites the robust levels of cash held by tech companies, which should only grow if President Donald Trump‘s proposed repatriation tax holiday goes into effect. In fact, tech is the only sector in the S&P 500 index that carries more cash than debt on corporate balance sheets.

In another contrast to the 90s bubble, the proportion of investment funds with a tech focus is half of what it was around 2000. Further, tech IPOs now make up a far smaller portion of public offerings in the market, according to BAML.

A side-by-side analysis in BAML’s table below provides more data showing that the S&P 500 is less reliant on tech than it was in 2000, and that the sector is more profitable and less debt-laden nowadays.

Screen Shot 2017 10 12 at 12.00.25 PMBank of America Merrill LynchA comparison of S&P 500 tech in the dotcom bubble vs. today

That’s not to say everything is totally perfect for tech stocks. BAML recognises that there are still some major risks to the sector’s red-hot rally, and holds just an equalweight — or neutral — rating on the space.

First and foremost, tech is an extremely crowded sector. It’s almost been a victim of its own success in that sense, as investors have piled into proven winners. BAML finds that long-only relative tech exposure is the highest it’s ever been, dating back to 2008.

Because of this, “institutional investors may be more likely to sell than to buy,” Subramanian said.

Screen Shot 2017 10 12 at 12.32.24 PMBank of America Merrill LynchLarge cap active managers have a heavy weighting towards tech stocks, relative to history.

And while tech’s weighting is smaller than it was in 2000, it recently crossed a key threshold. It sits at roughly 24% of the S&P 500, which is above the 20% level that’s historically preceded underperformance over the following 12 months, BAML data show.

Another element to consider is that hedge funds have started to turn their backs on tech — to a degree. While the industry remains crowded, they have turned the most bearish in more than 16 months on the sector. It’s worth noting that they’re still net positive, and that this decline in sentiment is just relative to recent history.

Overall, it’s clear that the debate over whether to keep buying tech stocks will rage on for some time. What should also be clear, however, is that existing conditions are far from as scary as they were in the tech bubble.

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