The Next Tech Bubble?

Amidst the backdrop of high valuations and weaker-than-expected macroeconomic data, global indices fell. The S&P 500 lost -2.49% while the MSCI World Index fell -1.29%. The US Treasury active curve was unchanged over the week, suggesting credit markets have little concerns about a prolonged drop in the economy.

Are We In The Next Tech Bubble?

The S&P 500 has dropped roughly 5% from the high a couple of weeks ago. The leading explanation is that technology, the largest weighting of the index is trading expensively relative to its historical average. Apple, the largest single company in the benchmark, tends to be cited as evidence of this overvaluation. The below chart of Apples price to earnings (PE) ratio shows that the company is trading at a much higher level than it had been in prior years.

A higher-level view of the industry sectors provides a bit more context. The below chart shows the current price-to-earnings as a ratio of each industry’s historical average as of 9/15/2020. Values over one would indicate sectors that are trading at more expensive levels than they typically do. When we look at the levels around the last tech bubble, the info tech sector reached a P/E high of 71.24. That coincided with declining earnings in the sector, something we are not currently seeing in the tech sector.

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