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Fears that the dot-com bubble will burst again miss an important difference, Chief Investment Officer Julius Baer wrote in the Financial Times.
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Yves Bonzon said that in 1999, the Federal Reserve eased policy, effectively injecting liquidity into rising stock prices.
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He also noted that today’s valuation is rather supported by high-quality earnings and record free cash flow.
Warnings of a dot-com bubble flare-up overlook important differences between then and today’s bull market, Julius Baer’s chief investment officer wrote in the Financial Times.
Yves Bonzon said that unlike in 1999, the ongoing rise in stock prices is not due to easy monetary policy, and that stock valuations are well below their turn-of-the-century levels.
“From a technical standpoint, investor positioning appears to be stuck, and it is true that some parts of the U.S. stock market are reaching overbought territory,” he said. “But observers who compare it to the dot-com bubble are barking up the wrong tree.”
By the same year, the Fed had eased policy by 75 basis points in response to the Asian currency devaluation crisis. This in turn spurred a sharp rise in the dot-com market, injecting ample liquidity into the market.
By comparison, Bonzon said today’s rally is the result of the most aggressive tightening campaign in the Fed’s history, not the result of excessive money supply. Since March 2022, the federal funds rate has increased by 525 basis points, and US M2 supply is still contracting at 2.3% y/y.
Bonzon added that such an environment not only eliminates the need for investors to pursue riskier investments, but also makes it difficult for companies to artificially inflate their profits.
Therefore, any price fears stemming from today’s surge in top mega-cap stocks are misplaced, as this rally has been driven by strong earnings and record levels of cash generated after expenses.
Metrics such as forward price-to-earnings ratios show that dot-com stocks were more than twice as expensive as the top seven stocks on the S&P 500 today. There’s no evidence of a bubble in the price-to-earnings ratio, Bonzon said. .
“Investors who conclude that large-cap U.S. stocks are overvalued are implicitly discounting that free cash flow metrics, which have improved rapidly in recent decades, will return to their lower averages over the long term,” he said. “This means that the This cannot happen without globalization and a complete reversal of the US corporate tax rate.
“Overall, the resilience of the stock market in the face of interest rate normalization demonstrates the excellent quality of current stock market returns,” he said, adding, “This is not a rehash of 1999.” .
Read the original article on Business Insider
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