“How was your day, honey?”
Jeff Bezos: “Fine. I made thirteen billion.”
Such is the current success of Amazon and the leading technology companies that the world’s richest man could see his paper wealth jump by such a staggering amount earlier this week after shares of the e-commerce and web services giant surged about seven per cent.
On June 6, we posed the question whether Amazon is the ultimate pandemic stock.
Evidently, it is.
It’s up more than 26% since then, outpacing its rivals Facebook, Apple, Netflix and Google over that span.
Second best over that period has been Microsoft, which is glaringly excluded from the FAANG acronym but is a member in spirit. How about MAANG-F? Never mind.
Let’s drop Netflix because its market cap is a measly $216 billion and go with the Big Five.
Lazy dot-com comparisons
Easy and lazy comparisons have been made between the current tech run-up and the dot-com boom in the late 1990s.
Yes, the NASDAQ 100 is frothy trading at 30 times forward earnings, the highest level since 2004, and the Big Five make up a disproportionate 42 per cent of the index. But these are all thriving, legitimate businesses that gush cash and have millions, in fact billions of customers unlike a lot of those silly web-based companies back then that were nothing but absurd concepts with .com slapped on their names and zero revenue.
Which brings us to a comment and chart from RBC Capital Markets that caught our eye.
As mentioned in our borderline click bait-y headline, RBC picked up on a note from Sven Henrich, founder and lead market strategist at NorthmanTrader, who says the difference between the total stock market value of roughly $33.2 trillion (as of Monday’s close), as measured by the Wilshire 5000 Total Market Index*, to U.S. gross domestic product (GDP) is 154.2 per cent, the widest-ever gap.
Hence, RBC’s “largest financial bubble in our lifetimes” comment, according to that metric.
Break that market capitalization down and we find that roughly $6.6 trillion of it is made up of the Big Five, nearly 20 per cent.
Taking that further, the top 10 tech stocks have been driving the S&P 500 this year while roughly 450 stocks are down year-to-date.
The bottom 10 are off between 60 per cent, in the case of Royal Caribbean Cruise Lines, with the worst laggard, Ingersoll-Rand, erasing 76 per cent of its value. This extreme bifurcation in the market hardly screams bubble.
But are the top tech stocks in a bubble?
CIBC Capital Markets would argue no.
Ian de Verteuil, head of portfolio strategy, studied price-to-earnings ratios going back thirty years.
He determined that not only is every sector, with the exception of health care, trading at higher levels than their historical norms but also that, “…technology and communications actually appear less ‘overpriced’ than other cyclical sectors.”
On top of that, de Verteuil examined the various sectors using standard deviation, a comparative statistical tool measuring a company’s valuation against its history, and found technology trading at 3.4 standard deviations higher than its average.
But that’s nothing compared to the energy sector’s standard deviation of 7.7.
The bottom line: The Big Five are at heady levels and eerily disconnected from the rest of the market but their unique, defendable, market-leading positions – especially as technology accelerates during the pandemic – justify investor enthusiasm. Although the companies stretched valuations have made meeting those elevated growth projections difficult.
And the market value to GDP stat is eye-opening but this current environment doesn’t seem like any kind of bubbly mania, yet.
* The Wilshire 5000 Total Market Index was introduced in 1974 but now actually contains about 3,500 stocks.
For more historical perspective on bubbles, here’s an excellent short column by Jason Zweig of the Wall Street Journal who explains why certain elements are missing right now for stocks to be in a bubble.