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Photo: Reuters
Photo: Reuters

Why the rally in US tech stocks is unlike the dot-com bubble

The US tech stocks would continue to attract investors because of better growth prospects, say analysts

The big five US technology stocks finally fell under their own weight, with shares of Alphabet, Amazon, Apple, Facebook and Microsoft taking a knock of 4-8% on Thursday. The sustained run-up in the price of these five stocks from the past few months had drawn comparisons to the dot-com boom. Last week’s bout of correction has stoked concerns that this bubble may now be bursting.

The sector’s valuations have been a concern, but there was no particular fundamental catalyst behind the sell-off, according to analysts. The correction is being attributed to the unusually high options trading by Japan’s SoftBank Group Corp., among other things. The Japanese company bought options tied to around $50 billion worth of individual tech stocks, said news reports.

Global equities also took a hit as the week came to a close. However, the Asian and European markets saw some recovery on Monday. The US market was closed for Labour Day.

Volatile times
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Volatile times

The market correction was long overdue, but may be short-lived, said equity analysts. The flush of liquidity injected by global central banks would keep the sentiment of equity investors afloat. The US technology stocks, key beneficiaries of the pandemic, would continue to attract investors because of the comparatively better growth prospects, analysts said.

“While tech valuations remain elevated, they are far below dotcom bubble levels, with the added support of low rates today. We do not expect a significant sustained sell-off given the sector’s relative attraction," analysts at Nomura said in a report on 7 September.

Comparisons with the dot-com boom are overdone, concurred Oliver Jones, senior markets economist, Capital Economics. “Big tech’s valuation premium has risen steadily for a few years and is quite big... (but) it is clearly not in the same league as that of the IT sector when the dotcom mania was in full swing," he said in a note.

Earnings of these firms are far superior compared to the tech stocks that rode the dot-com bubble.

Nonetheless, with SoftBank weighing in with its so-called whale trades, volatility is expected to be elevated in the near-term. The Chicago Board Options Exchange volatility index jumped 34% last week.

“Global stock markets seem to be largely stabilizing on Monday, after the sharp slide in technology stocks. However, investor sentiment remains tense and volatility has increased," analysts at Swiss-based LGT bank said in note on 7 September.

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