Welcome to the Chart of the Week.
The Chart of the Week highlights stock market moves in the run-up to the tech bubble versus today. In 2023, the US stock market saw a whopping 26% return, largely thanks to the tech sector, which soared by nearly 60%. This kind of growth might remind some people of the late 1990s, often called the “tech bubble” era. However, comparing the two periods too closely might be jumping the gun.
Here’s why: last year’s stock market surge seems similar to the big gains we saw in the late 1990s. But, let’s not forget, back then, those huge gains happened year after year for five years straight (from 1995 to 1999), with annual returns consistently exceeding 20%. That’s a lot more sustained than what we’ve seen recently.
But the real difference lies in the earnings. Back in the 1990s, a lot of those big gains were happening in tech companies that weren’t actually making any money. They had exciting ideas and were growing fast, but they weren’t profitable or sustainable. It was like building a castle on sand.
Nowadays, the excitement is mostly around big tech giants like NVIDIA, Microsoft, Alphabet (Google), Amazon, and Meta (Facebook). These companies are not only making huge profits, but they’re also leaders in their fields with solid business models. In fact, together, they raked in a whopping quarter of a trillion dollars in earnings in 2023.
So, while there may be some similarities between now and the tech bubble days, they’re not quite the same. The foundation supporting today’s tech sector is much stronger, with real profits to back up the hype.
However, while everyone is focused on tech, there is another area of the market that looks very compelling: smaller companies. With rate cuts around the corner, there is a catalyst in sight, too.
Takeaway: Diversification opens up opportunities.
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