Chart of the Week

Our research shows that there is a stark difference between today’s technology stock valuations and those at the 2000 peak. The chart illustrates this by plotting price/earnings (P/E) ratios of the S&P 500 Information Technology sector, the average P/E of the largest six technology companies, and the largest technology company in both periods.

It is astonishing to think that from today’s already elevated levels, valuations would need to roughly double for the Information Technology sector, triple for the top six tech companies, and quadruple for the largest tech company to reach dot-com peak P/E multiples. None of this is to deny that there are pockets of froth in the market — there are. But the notion that these metrics are currently on par with 2000 is, in our view, demonstrably incorrect.

• Our view is that a durable technology spending trend is in progress and that the economy is still closer to the beginning than to the end of this artificial intelligence buildout. Earnings, sales, and capital expenditure plans for the mega-tech companies leading this trend have surprised to the upside — including in the most recent reporting season.
• While we believe artificial intelligence stocks are not at 2000 bubble levels, their valuations were a key consideration in our recent rebalancing away from the Communication Services and Information Technology sectors into Utilities, Industrials, and Financials.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Investments that are concentrated in a specific sector or industry may be subject to a higher degree of market risk than investments that are more diversified. Technology and internet-related stocks, especially of smaller, less-seasoned companies, tend to be more volatile than the overall market.

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