Yardeni Research says that two parts of the S&P 500 index have reached levels seen before the tech bubble burst in early 2000, which suggests that the U.S. stock market may be in a melt-up.
In an email on Monday, Yardeni said that the IT and communication services sectors now make up “a whopping 41.6%” of the market value of the S&P 500. The chart below shows that that’s how high they got right before the tech bubble burst in early 2000.
This year, the U.S. stock market has been going up thanks to stocks in what are called “Big Tech” industries. These include the tech, communication services, and consumer discretionary sectors of the S&P 500. Their stocks are doing well because investors are excited about artificial intelligence. Nvidia Corp.’s stock NVDA, -6.68% has gone up more than 141% so far this year, based on trading levels on Monday morning.
When the market crashed in the late 1990s, Cisco CSCO, -0.02%, “which made telecommunications equipment to build out the Internet,” was in charge. This time, Nvidia is in charge of what may be a bigger market crash. When the research firm looks “under the hood at valuations,” they find “a big difference.”
It reached a high point of about 131 for Cisco on March 27, 2000. Since early 2020, Nvidia’s has been “fluctuating widely and wildly” between 25 and 80, as shown in the note.
Yardeni found that even though tech and communication services are as big now as they were during the dot-com bubble, their combined growth doesn’t look as bad when you look at how much money they make.
The firm’s researchers said, “These two sectors now make up 33.0% of the S&P 500’s forward earnings, compared to just under 24.0% when the Tech Wreck began in 2000. This may help to justify such a high multiple, or at least more so than it did back then.”
Yardeni warned that forward earnings aren’t “the same as actual earnings,” which is “the problem.”
The company spoke about how the combined earnings estimate for technology and communication services fell sharply until late 2003. This was after their total forward earnings had grown by more than 200% from early 1995 to late 2000.
As of the last check, FactSet data showed that shares of tech giant Nvidia fell sharply, but the U.S. stock market as a whole was mostly going up on Monday. The S&P 500 SPX was up slightly at around 5,477. With a market value of more than $3 trillion, Nvidia fell about 4.6% around noon.
At the last check, FactSet data showed that big tech stocks were mixed. Meta Platforms Inc. META, +0.83%, the parent company of Facebook, rose 1.5%, Apple Inc. AAPL, +0.31%, gained 2.1%, Tesla Inc. TSLA, -0.23%, rose 1%, and Microsoft Corp. MSFT, -0.47% edged up 0.1%. It was down 0.7% for Amazon.com Inc. AMZN, -1.86% and down 0.1% for Alphabet Inc. GOOGL, -0.23% GOOG, +0.29%, which owns Google.
Not one of these seven closely watched Big Tech stocks is down so far this year. Only Tesla, which is in the S&P 500’s consumer-discretionary sector, is.
“Some of the most optimistic price targets on Wall Street have been smashed by the bull market,” Yardeni said. According to the company, “we are sticking with our S&P 500” year-end target of 5,400. They were also positive about the next two years for U.S. stocks.
Scholars at the company wrote, “We look forward to the bull run lifting the S&P 500 index to 6,000 by the end of 2025 and to 6,500 by the end of 2026.”
