October 9, 2017
The technical indicators of the stock market are reaching crazy levels.
In nearly three years, six tech stocks – Facebook, Amazon, Google, Netflix, Apple and Microsoft – have seen their weighted average price-to-earnings ratios increase 50 percent. Between January 2015 and August 2017, these six stocks’ collective market capitalization accounted for 40 percent of the S&P 500’s increase from $17.7 trillion to $21.2 trillion. Put another way, those six stocks accounted for almost half of the entire growth of the S&P 500.
A handful of securities accounting for so much overall growth is a bit scary, especially if they’re tech stocks. Does anyone remember 2000? Back then, Microsoft, Dell, Cisco and Intel saw their market capitalization double from $850 billion to $1.65 trillion. At the March 2000 peak, Microsoft was trading at 50 times earnings. For Intel and Cisco, it was 60 and 200 times per earnings, respectively. Two years later, the four stocks collectively lost 75 percent of their value. We may be on a similar path now. Facebook is trading around 40 times earnings, while Amazon is at 190 and Netflix at 217, respectively.
Look at Amazon’s stock price. The chart’s curve is like a hockey stick.
If nothing more, I think an argument can be made that we’ve learned nothing from 2000. Emotional buying is the norm. Stocks will come back to Earth at some point. However, most investors will not want to be on that return trip.