US Equities: Less of a Hostage to Information Technology Compared to 2000
Some commentators believe that US equities are currently in a bubble, although the present backdrop is more nuanced than during the late-1990s. Misplaced euphoria about the benefits of technological innovation was the main reason for elevated equity valuations in the previous bubble period.
Economic outperformance by the information technology sector during the 1990s cannot rationalise the stratospheric rise in the sector’s equity prices and their subsequent distortion to overall US equity valuations. By contrast, the current US bull market is not solely about information technology due to the strong participation by the consumer discretionary, as well as financial and industrial sectors.
The market weighting of information technology within the S&P500 peaked at 34.5% in 2000 due to excessively bullish long-term forecasts by analysts. Meanwhile, the current reading is 23.2%, reflecting far more realistic assessments about the long-term outlook.
There is currently far less irrational exuberance in analysts’ long-term EPS growth expectations for the S&P500 and the information technology sector compared to 2000, although current readings still look challenging against a backdrop of slower nominal GDP growth.
Lower forward P/E valuations for the S&P500 and information technology sector are a major difference between the current environment and the bubble period of the late-1990s. Operating margin improvements within the technology sector have been a major factor underpinning EPS growth and bringing the sector’s valuation into more reasonable territory.
Excessive optimism about the long-term growth prospects for information technology produced strong capacity growth during the bubble period, along with ensuing deflationary consequences. Sizeable shareholder disbursements, notably buybacks, suggest information technology companies are struggling to find new long-term growth opportunities.
DeSaque Macro Research Limited was formed by Said DeSaque in April 2012 with the intention of delivering independent global macro investment insights and new thematic long-term ideas to investors, along with an agnostic opinion of the markets.
Said DeSaque has over 29 years of experience working as a professional economist in financial services, primarily based in London. His working role has involved extensive travel around the world, bringing him into contact with investors of different cultural backgrounds and investment requirements. Prior to establishing DeSaque Macro Research, Said held positions as Senior Economist and Investment Strategist at US banks Robert W Baird and William Blair. He began his career as a graduate at PaineWebber in 1986, where he became Head of the London Economics Department in 1996. This role allowed him to engage with senior investment professionals, alongside regulators and provided a unique perspective of market intelligence at work.
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