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Capital Ideas™ 
Investment insights from Capital Group

Categories
Technology & Innovation
Are tech stocks the next bubble? Not if you look at profits
August 27, 2017

Unlike the Dot-Com Bubble, Profits Are Now in Sync With Prices



U.S. technology stock prices have surged for years, leading some to wonder if this rally can continue. But there are several reasons we believe this is not a repeat of the tech bubble. At its peak in 2000, the technology sector represented 34% of the S&P 500 Index’s market cap, but only 16% of its cumulative earnings. Unprofitable companies often sold for unsustainable prices, and the sector crashed back to levels more in line with fundamentals. Over the last decade, tech’s index weight has been on the rise again, but the pace has been steady and proportionate to earnings growth. There is no doubt that valuations are elevated, but with profits to support higher prices, the technology sector’s long-term growth prospects seem to be sustainable.


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