Many stock analysts compare the current tech-heavy U.S. market to the late 1990s internet-stock boom, specifically 1999 — just before the sharp run-up to the dot-com bust in 2000. The subsequent years were some of the worst in market history after the tech bubble deflated.
Over the next two weeks, investors will get a clearer picture of the U.S. market’s health — especially Big Tech and AI-related stocks — as companies report second-quarter earnings.
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Based on what we have seen so far, here are several key trends for investors to watch, and what they mean for your portfolio.
1. The bull market has legs: The S&P 500 SPX has gained close to 20% over the past 12 months. And yet average stock valuations actually declined. The S&P 500 recently traded at a price-to-earnings ratio of 22.1, down from 23.7 at the same point last year. The reason: that earnings have been rising faster than stock prices.
Full reporting for the quarter should confirm this trend continues, and that’s bullish for stocks, says Nick Raich, who tracks earnings and earnings revisions closely at his research service the Earnings Scout. “I already know what the data will look like based on the early reporters,” he says.
Raich expects 20% overall earnings growth for the quarter, more than three times the typical gain of around 6%. Based on that, stocks should continue moving higher. As of July 17, just over 50 of the S&P 500 companies had reported. Raich says 96% of these early reporters have blown past estimates, posting 32.4% overall earnings growth. Last week’s improving earnings-estimates momentum among banks showed that rising earnings expectations are broadening out beyond technology and consumer companies.
“It is hard to say a bearish thing about earnings other than, ‘This will be as good as it gets,’ ” Raich said in a recent interview. “That’s the bearish argument. But there is no evidence of that yet. We still have the acceleration underway. We are in a boom. We are in the ‘Roaring ’20s.’ “
This earnings-revision strength goes beyond tactics such as cost cutting, share repurchases and accounting tricks. Sales growth is unusually strong at about 19% on a year-over-year basis, more than three times the long-term trend.
For a key confirmation, Raich points to earnings revisions for the third quarter, which ends on Sept. 30. After all, future stock gains will depend on whether forward earnings-estimate momentum can keep improving. So far, that’s the case. Third-quarter earnings estimates were recently up 3.7%. Normally, forward-quarter estimates get cut as companies report the trailing quarter. “This is better than normal,” Raich says. “This is a bullish signal.”
The bottom line: Resilient earnings and the improving earnings-estimates momentum should support additional stock-market gains and new all-time highs this year for the S&P 500.
2. This is not 1999: Raich doesn’t buy the market-top comparisons to the dot-com era. To predict where the market might go next, the key is to look for divergences between earnings-growth momentum and stock prices.
For example, in 1999 the upward revisions to earnings estimates were slowing for six months as stocks kept going higher in the late stage of the dot-com bubble. Divergences like that resolve one way or another — either stock prices fall or earnings-estimate momentum gets back on track. In 2000, the divergence was resolved by a sharp selloff.
The problem with the 1999 parallel is that right now there’s no similar divergence. Stocks keep going up, but so does earnings-estimate momentum. Says Raich: “The earnings revision trends are not exhibiting the pattern we saw in 2000. We are still in the ‘getting better’ phase. This is more like 1997 or 1998 rather than 2000. People running for the exits are premature.”
3. Stay long technology, even chip stocks: Investment strategist Larry McDonald of the Bear Traps Report says he believes that hyperscalers including Meta Platforms META and Microsoft MSFT will guide down capital-spending forecasts when they report earnings later this month because of concern about returns on their AI investments. This change would be bullish for Meta but not for semiconductor stocks. Data-center growth may also slow in the face of resistance from communities. Says McDonald: “Semiconductor stocks are going to get crushed.”
Raich disagrees and says he doesn’t see any of those red flags in the earnings-estimate revisions. “Many chip stocks, including AMD AMD, Intel INTC and Marvell MRVL, continue to see estimates rise at increasing rates,” he says. “Market tops do not typically occur when earnings momentum is accelerating.”
Chip-sector strength was also confirmed recently by solid second-quarter results for chip-equipment company ASML Holding ASML, and for Nvidia NVDA last month.
Raich is also bullish on tech stocks overall, including Microsoft. Says Raich: “The only thing that is dropping at Microsoft is the stock price. Earnings momentum is still going up.” He recommends overweight positions in technology stocks because the sector has some of the market’s strongest earnings-estimate-revision momentum. “EPS estimates continue to rise at improving rates,” Raich says. “Our message remains clear: Stay long stocks, remain overweight technology and stay long the AI trade.”
Insider support
Large amounts of insider buying at four tech-sector companies support a bullish view on the group.
At Fiserv FISV, a number of insiders recently bought $1.7 million in stock at prices up to $50.60. At Adobe ADBE, a company director recently purchased $1.9 million in stock at $194.51. This reverses earlier insider selling in Adobe shares at around $245. Reversals enhance the insider signal. Meanwhile, Autodesk ADSK insiders including the CEO bought $2.1 million in stock at prices ranging between $189 and $231. Insider buying at Broadcom AVGO has also picked up — the board chair bought $370,000 in stock at $373.56.
Micron is still a major market force
Even Micron Technology MU remains a hold. The DRAM maker is controversial, both because the shares are up more than 650% in the past year and because critics say the stock might not warrant its current price-to-sales ratio of 11.3. That’s more than double its trailing five-year average price-to-sales ratio of 4.9, according to LSEG.
But if history is any guide, Micron has more upside. True, Micron looks vulnerable because its positive-revision momentum has slowed sharply. Estimate revisions advanced 82.4% three months ago and 105% six months ago, compared with 25% in the most recent quarter. This makes Raich more cautious on Micron’s stock now. But he says it could still have upside. He points to Nvidia as an example. Two years ago, earnings-revision momentum at Nvidia slowed for six quarters before the stock price fell. So far, Micron’s earnings-estimate momentum has diverged for two quarters.
“[Micron’s] stock is overvalued, but stocks can get more overvalued,” Raich says. “If Micron follows the same pattern as Nvidia, Micron’s stock can be bid up for three more quarters.”
That is a dangerous game for investors, though. The longer earnings momentum declines while a stock goes higher, the harder the stock eventually falls — just like what happened to the dot-coms in 2000.
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