Soaring US stocks echo dotcom rally but with lower valuations

While gains in US evoke comparisons with dotcom era, stock prices seen as reasonable

PUBLISHED : Thursday, 28 August, 2014, 5:03am
UPDATED : Thursday, 28 August, 2014, 5:03am

Every day, the American bull market looks more and more like the dotcom bubble of the late 1990s. Except when it comes to valuations.

The Standard & Poor's 500 Index briefly jumped above 2,000 points for the first time on Monday and the Nasdaq Composite Index is within 10 per cent of a record reached in March 2000. Investors have seen annualised returns of 24.5 per cent since March 2009, compared with 27.1 per cent over an equal amount of days ending on March 24, 2000, the peak of the internet rally, data showed.

Stocks are catching up to the pace of more than a decade ago amid record profits, near-zero interest rates and economic growth that is expected to accelerate. While the dotcom bubble peaked with the S&P 500 trading at close to 30 times annual earnings of its companies, the valuation is about 19 times now, data from S&P Dow Jones Indices show.

"We're on the expensive side of fair value, but certainly not in the bubble place they were in the 2000 period or in a place that concerns us," said Ed Hyland, global investment specialist at JP Morgan Chase Private Bank. "There is potential for the market to go higher."

Five years of gains have driven the S&P 500 up 195 per cent, compared with a 236 per cent advance over the comparable period that ended in March 2000. With the US Federal Reserve calling valuations in smaller biotechnology and social-media companies "stretched" and mega deals resurfacing, concern that prices are too high is growing.

Over the past three years, investors have seen a flood of technology and internet companies go public, including King Digital Entertainment, Yelp and Twitter. Alibaba Group is working on an initial public offering that may be the biggest in US history.

"At this point, what the market should be doing is debatable," said Brad McMillan, chief executive of Commonwealth Financial Network. "Right now there's a clear upward trend."

This bull market has seen widespread gains across all kinds of companies, unlike the technology bubble when the best performance was concentrated in computer shares.

The S&P 500 Equal Weight Index, which strips out biases related to market value, has risen an annualised 28 per cent since 2009, almost double the return from the last half of the internet bubble.

An average of 380 S&P 500 stocks have increased during each of the last five years, compared with 307 in the 1990s, data showed.

The "market is being rational, responding to improving domestic economic news, extraordinarily low interest rates, easy monetary policy and limited inflation", said Howard Ward, chief investment officer for growth equities at Gamco Investors.

The Nasdaq peaked at 5,048.62 on March 10, 2000, and would have to rise more than 10 per cent from its current level to surpass that record. Since stocks bottomed five years ago, the gauge's best annual performance was in 2009, when it rose 44 per cent. That is about half its return in 1999.

"The underlying fundamentals justify the level of US stocks," said Cameron Hinds, regional chief investment officer at Wells Fargo Bank.