Tech stock rally is far from repeating the 1990s dot-com bubble, SunTrust says

• Though tech stocks' rally has outpaced most other sectors, the sector is far from returning to dot-com era levels of overvaluation, Keith Lerner, chief market strategist at SunTrust Advisory Services, said.
• The tech sector is currently up 35% over the past 12 months. At the peak of the dot-com boom in 2000, the same sector was up more than 100% over the same period.
• The small group of tech giants also contributes a greater share of the S&P 500's profits and cash flow, Lerner said. Where the index's top five stocks once counted for just 2% of its free cash flow, they now contribute 22%.
• Tech stocks' rally is largely supported by strong profit growth "rather than the speculative excess that accompanied the 2000 tech bubble," Lerner added.
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Investors fearing another tech bubble need not worry, Keith Lerner, chief market strategist at SunTrust Advisory Services, said in a note.

Investors continue to drive cash into tech giants, betting the companies are best positioned to ride out the coronavirus pandemic's fallout. The top five tech stocks — Microsoft, Apple, Amazon, Alphabet, and Facebook — now make up roughly 22% of the S&P 500. "Concerns of another technology bubble are rising," Lerner said, yet those comparing the current market to that seen during the late-1990s dot-com era are mistaken.

To start, the tech-heavy Nasdaq composite is nowhere near the lofty valuations seen just before the tech bubble burst in 2000. The index currently trades 22% above its long-term price trend, well below the 280% deviation seen two decades ago.

The tech sector itself also trades more modestly than before. While included stocks traded more than 100% higher year-over-year in 2000, the sector is currently up 35% over the past 12 months.

"Absolute valuations are elevated but are less than half of the levels reached back then," Lerner added.

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Tech giants' weighting in major indexes presents a risk for the market, the strategist warned. Should Apple, Amazon, or Facebook disappoint with an upcoming earnings report, the broader market will likely plunge on the news.

Still, the small group of stocks currently comprise a greater share of the index's profits and cash flow, Lerner said. The S&P 500's five biggest components comprised 14% of the index in 2000 but only contributed 2% of its overall cash flow. Today, the top five picks take up 22% of the S&P 500 and contribute the same share of free cash flow.

Judging tech stocks by their price-earnings ratios also suggests they're far from reaching dot-com-bubble levels. The height of the tech boom saw shares trade with a 2.3x premium to the S&P 500 on a trailing price-earnings basis, Lerner highlighted. The sector currently trades at a 1.3x premium by the same metric. Forward-looking multiples tell a similar story. Tech stocks trade at a lower premium than at any point during the pre-financial crisis bull market.

Lastly, tech giants largely boast stronger fundamentals amid the coronavirus pandemic than the rest of the S&P 500. Where the index's forward earnings-per-share guidance tanked at the start of the outbreak, the tech sector's largely held strong and is close to retaking record highs. The group's weekslong rally is mostly backed up by resilient profit growth "rather than the speculative excess that accompanied the 2000 tech bubble," Lerner said.

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