At the top of the Tech Bubble in 2000, the top-10 American tech stocks reached 30% of GDP (gross domestic product).
How much are they worth today and how should it affect your money management for the future?
I’ll begin by giving some much-needed context.
The future of tech stocks is in jeopardy and is likely in for a bit of a reality check.
The problem in 2000 was the same as it is today- growth expectations were too high for these companies.
Basically, the value of these companies exceeded what the whole economy could keep up with.
Tech share prices were simply growing too fast.
In 2000 many of these tech companies were spending a lot to address the Y2K computer problem, which made the technology sector unsustainable- a first prick leading to the bubble popping.
The environment literally and truly became unsustainable.
Venture capitalists and other investors were heavily interested in the NASDAQ for high short-term growth rather than realizing the top forming in both growth and profitability.
Over the next two and a half years, the value of these tech-industry companies would plunge like never before to just six percent of GDP.
It’s imperative to note this volatility, down to 6% from 30%.
Obviously, stock prices for these companies plummeted, leading the entire economy into a recession resulting from the burst bubble.
Let’s fast-forward to 2021: the height of today’s mega-cap-tech-led stock market bubble.
The Top-10 US tech companies have reached an incredible 56% of GDP, 87% higher than it was at the peak of the 2000 tech bubble we already discussed.
The record-breaking monetary stimulus from the federal reserve during the Covid pandemic accelerated the move to the cloud. Of course, this led to the corresponding IT spending boom, exactly like Y2K.
Just in the last calendar year alone, investors have extrapolated unsustainable growth and profitability to justify high valuations instead of recognizing a top.
What is still incredible to me is that, even as the fundamentals are already deteriorating, the downside risk for these mega-caps remains unthinkable to most market participants today.
Consider your personal finance: if the 10 mega-cap tech stocks approached the same cyclical low valuation levels that they did in 2002 of 6 times EV to GDP, it would look as if the world’s economy was ending.
Honestly, it probably remains unlikely to go that low, but you get a sense of the extremity I’m talking about here. Something to consider properly.