There have been comparisons lately between the market peak of the dot-com bubble from 1999 to 2000 and today’s.
Then as now, we’ve witnessed a tech boom that has minted billionaires and raised concerns about anticompetitive practices. Venture capitalists have supported nose-bleed valuations for tech unicorns. A wave of over-hyped tech IPOs have been hitting the market.
And Goldman Sachs noted another similarity between our current reality and that of the turn-of-the-century tech bubble: the concentration of the market.
“The S&P 500 market cap is concentrated in the five largest stocks to a degree not witnessed since the peak of the tech bubble,” wrote Goldman equity strategist David Kostin in a note.
The five stocks n question—Facebook (NASDAQ: FB), Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT), and Google-parent Alphabet (NASDAQ: GOOGL, GOOG)—account for 18% of the S&P 500’s total market cap.
The last time the index’s value was so concentrated? At the top of the market in 2000, only back then it was Cisco (NASDAQ: CSCO), Exxon Mobile (NYSE: XOM), General Electric (NYSE: GE), Intel (NASDAQ: INTC), and Microsoft dominating the market.
However, unlike in the year 2000, the big tech giants of today are more fairly valued and devote more revenue to keeping their growth stories going, according to Kostin.
“Lower growth expectations, lower valuations, and a greater re-investment ratio suggests the current concentration may be more sustainable than it proved to be in 2000,” Kostin noted.
Kostin’s argument has been reinforced halfway through the Q4 earnings season with Facebook, Amazon, Apple and Microsoft all delivering solid reports.
Apple reported quarterly sales of $92 billion, a 9% gain year-over-year and 4% above consensus estimates. Microsoft too delivered positive results reporting 14% year-over-year revenue growth and guiding for double-digit growth for 2020 as well.
Amazon has perhaps delivered the best results, posting Q4 revenue growth of 21% to $87 billion.
These better-than-expected earnings have kept traditional valuation metrics in place, with the FAAMG stocks trading at a price-to-earnings ratio of 30 times, far better than the 47 times the five top stocks were at just before the tech bubble burst twenty years ago.
“In order to avoid repeating the share price collapse experienced by their predecessors, today’s market cap leaders will need to at least meet—and preferably exceed—current consensus growth expectations,” Kostin concluded in the note. “This time, expectations seem more achievable based on recent results and management guidance.”