This Is Not the 1990s Tech Boom

There are important differences between the late 1990s tech boom and where we are now.

Interest rates are fundamental to how all assets are valued and they are more relevant for higher valued, “longer duration” equities. Citi analysts see the US equity market – and technology sector – trading in a more rational way today than it was in the 1990s when markets ignored interest rates with ever higher growth expectations.

In Citi’s view, the catalyst for a tech reckoning (part of the growth stock universe) is missing amid continued economic expansion. Today, tech buyers are flush with cash, and the bond market offers a low 3.5% long-term financing even to firms with the weakest investment grade rating. Most importantly, the absolute valuation comparisons of the 1990s with today ignores relative valuation. Looking at the bond market today relative to the 1990s tech bubble period, Citi analysts see that a future dollar of interest is now valued 5X higher than at the tech markets prior peak.

The valuation of US growth shares such as tech stocks overall implies low future returns – but not as low as the decade following the year-2000 tech collapse – rather, more likely in the low-to-mid single digits over the coming full decade. In comparison, unlike the late 1990s, when fixed income yields were 7%, bonds offer little value or competition to growth stocks at sub 2% yields.

Meanwhile, US value shares and most other global equities trade at far-lower relative valuations than during the tech bubble period, roughly 16X expected EPS, or close to their long-term average. While it is unclear how long the preference for US growth shares (at 29X expected EPS) may persist, the overall return picture for global equities is a substantially stronger one than at the 2000 market peak.

In Citi’s view, it is possible that high valuations may become higher first, driven by the early-cycle EPS outlook, before moderating. Truly higher earnings could absorb the valuation hit from higher interest rates. Remember that only when tech revenues and profits peaked in 2000 did share prices collapse. There is no evidence to suggest the 18-month economic recovery could either falter or become less reliant on tech.

The outlook for the next year could be rewarding for cyclical tech industries such as semiconductors. The longer-term outlook for cybersecurity seems highly robust. Emerging health science, energy technologies, logistics and e-commerce also deserve investment allocations, though it needs to come with broader diversification across the global economy. Fortunately for investors, portfolio diversification could be achieved at a reasonable valuation today, unlike 1999.