What the 2000 Tech Bubble Can Tell Us About Today’s Stock Market

Key conclusions

According to a recent note from Deutsche Bank, recent losses in technology stocks have coincided with gains in utilities, health care and consumer staples stocks, echoing the dot-com bubble of 2000.
Uncertainty over the U.S. election and monetary policy could continue to weigh on technology stocks in the coming months, according to one analyst.
Even after the dot-com bubble burst, technology investments significantly outperformed the overall market over the long term.

There is reason to believe history is repeating itself, according to a recent note from Deutsche Bank that draws a parallel between the current rotation in large-cap technology stocks and the bursting of the tech bubble in 2000.

In the nine months since the bubble peaked in March 2000, technology stocks have fallen more than 50%. Meanwhile, the consumer discretionary, utilities, and health care sectors have risen more than 35%.

German bank

Research analyst Jim Reid sees parallels between that moment and the current sector rotation in big tech stocks. The Magnificent Seven lost about 12% of its value between July 10 and Thursday, though it is regaining some of that loss in today’s session. The S&P 500 has lost nearly 4% over the same period. Still, seven of the 10 sectors in the index rose during that time, led by utilities and health care, as they did in 2000.

“The bottom line is that if tech continues to correct, we should see decent moves higher in other sectors, especially since tech’s size dwarfs other sectors,” Reid wrote. “So even a small rotation out of tech could mean a large rotation into other sectors.”

Uncertainty will weigh on the tech industry in the near future

The recent correction in fast-rising tech stocks naturally raises the question: Is it worth buying at the bottom? The answer depends on the timing.

“Technology is likely to remain volatile here, at least until the election, in our view,” said CFRA technology analyst Angelo Zino. Given the uncertainty caused by the upcoming election and expectations of interest rate cuts later in the year, he added: “We would say (tech) remains more limited and unpopular on a relative basis.”

SPX stands for S&P 500 and IXIC stands for Nasdaq Composite.

Here, the dot-com bubble offers another lesson. Technology and telecom stocks continued to decline after 2000, and lost about 85% and 75% of their value, respectively, by the end of the post-bubble bear market in late 2002. An investment in the technology-heavy Nasdaq Composite Index in early 2001 would have underperformed the S&P 500 through 2009. Since then, however, the performance of technology companies has improved significantly, and an investment in the Nasdaq would now outperform the same investment in the S&P 500 by more than 200 percentage points.

Zino sees potential for continued sector rotation. But, he says, “If you’re a long-term investor, we see this pullback as a pretty good opportunity.”