Global markets climbed again in May, brushing aside the ongoing conflict in the Middle East. With semiconductor shares soaring and SpaceX eyeing a US$1.8 trillion listing, comparisons to the dotcom bubble are everywhere. The truth, as usual, is more nuanced.
Despite a backdrop that would once have rattled markets - an escalating conflict involving Iran chief among them - global shares pushed higher again in May. The gains, as they have for much of the past two years, came from a narrow band of US technology companies. It has been a good month for investors – but also one in which the question we hear most often from clients has grown louder: is this 1999 all over again?
The comparison is understandable. Two stories from May could have been lifted straight from the dotcom era. Semiconductor stocks have come close to parabolic, with several now priced for a decade of perfection. And SpaceX is reportedly exploring a listing at a US$1.8 trillion valuation, a number that would make Elon Musk the world’s first trillionaire. When share prices and valuations start to head to the stratosphere, it is right to ask the hard questions.
The similarities are real
In several respects, the rhyme with 1999 is uncomfortably close. Then, as now, a genuinely transformational technology gave investors permission to stop worrying about price. Then, as now, market leadership narrowed to a handful of names, and a flood of richly valued listings arrived to meet the enthusiasm. And then, as now, quality and value were quietly left behind. By some measures, high-quality, reasonably priced companies have lagged the market by the widest margin since the late 1990s. That pattern – of discipline going out of fashion right up until the moment it suddenly matters - is a familiar one.
But so are the differences
It is also too easy to cry “bubble”. The companies leading this market are, for the most part, extraordinarily profitable, generating real cash flows at a scale the dotcom darlings could only dream of. Many of 1999’s poster children had no earnings at all; today’s leaders fund their expansion from their own cash flows (unlisted players like OpenAI and Anthropic aside…). Artificial intelligence is already delivering measurable productivity gains to many businesses. While the four most dangerous words in investing may be “this time is different” - it is equally as true that things are never exactly the same.
The truth likely sits somewhere in between. This is not a carbon copy of the dotcom bubble. Nor is it the all-clear that bullish commentators suggest. The risk today is less that the whole market is built on sand, and more the lesson Cisco taught in 2000: a wonderful business bought at the wrong price can still deliver a decade or more of disappointing returns.
The case for being picky
The first conclusion is that this is not a time to buy the market blindly. With the index increasingly concentrated in a handful of expensive names, a global share fund is far less diversified than it looks and is increasingly tied to a single theme. Being selective, owning businesses for reasons beyond momentum, and avoiding the most speculative or stratospherically valued names will matter more the higher this market climbs.
What’s different: caution is no longer expensive
For most of the past fifteen years, the trouble with caution was its cost. Cash paid nothing, bonds paid little, and so stepping back while markets ran meant giving up real returns. Discipline felt like a tax. That equation has flipped, and it is an important point for investors to absorb right now.
Bond yields in many markets are sitting at their highest level in well over a decade. At the same time, the equity risk premium (the extra return investors earn for taking share market risk instead of holding bonds) has compressed close to historic lows. Put those together and the picture is striking: equities are offering only a slim premium over bonds despite their additional volatility, while bonds now deliver a solid return and real protection if share markets correct.
In other words, the reward for patience has risen sharply. Holding some fixed income, or simply not chasing the hottest names, no longer means surrendering meaningful return the way it did a few years ago. Sitting on the sidelines - or at least closer to them - is more rewarding than it has been in a long time.
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