Wall Street looks more and more like the dot-com bubble

Wall Street dot-com bubble

The American stock market continues to trade near its all-time highs set last week. Although the week has had a downward trend, the S&P 500 continues to accumulate a profitability so far this year close to 19%, having gained 5% so far this summer. But there is reason to believe that the hangover after the binge is at hand.

So believes Matt Maley, an analyst at the firm Miller Tabak, who has pointed out in a note to his clients the similarities between the current situation and other stock market corrections, especially the one that followed the summer of 1998 and the subsequent dot-com bubble.

In this way, Maley considers that “we are seeing the same type of foam in the market that we saw in 1998″, and recalls that the S&P 500 is currently trading at 22.5 times its future profits, while its price/sales ratio is 3.1, much higher than in 2000.

To this must be added that the stock market is in a position of great leverage (as it already happened at the end of this century and in the 1920s that would lead to the crash of 1929), with the debt margin at maximum, with the risk that this implies for investments.

Additionally, the past few months have driven many retail investors into equities, now accounting for 20% of Wall Street’s daily traffic, double the number two years ago. Maley recalls that many stock market highs at times like 1929 or 2000 were caused by similar activity.

The analyst also compares the situation of the dot-com bubble with meme stocks since, in both cases, investors have forgotten the fundamental analysis – especially the creation of profits – to bet on a company.

On the other hand, it goes back to the late 1920s to compare the amount of capital that goes to unknown investments, currently with SPACs (special purpose acquisition companies, for its acronym in English), where investors contribute your money without knowing what operation is going to end up executing.

Despite all this, Maley does not want to risk a strong correction like those of then, but he has recommended to his clients to recover liquidity in the face of the increase in the risk/reward equation. “If/when this ‘rally of everything’ is over, most things will back down. So (at least) some cash will be one of the few hedges investors will find successful if / when the market corrects,” he says.