Jul 10, 2020 - Economy

Nasdaq's divergence from the Dow has some investors worried about a tech bubble

Data: FactSet; Chart: Axios Visuals
Data: FactSet; Chart: Axios Visuals

U.S. tech stocks continue rising even as the broader market falls, furthering the divide between the economically driven Dow Jones Industrial Average and the tech-heavy Nasdaq.

Why it matters: As earnings continue to be written down and the Nasdaq's value continues to rise, it has pushed the index to a forward price-to-earnings ratio of 34.2, well above its historical average, according to FactSet.

What's happening: "The Nasdaq 100 has beaten the S&P 500 for seven straight days, five straight weeks, 10 straight months," Bloomberg's Vildana Hajric, Sarah Ponczek and Lu Wang write.

  • "While that’s manna for bulls who own market proxies, it is also — at best — a mixed economic signal. As stirring as the rally has been, the whole thing can also be read as proof investors see the pandemic lockdown hanging around."
  • "Every time an automated, algorithmic Fang stock rallies, the theory goes, hopes for a speedy recovery in employment and consumer spending take a hit."

Between the lines: The outperformance has investors starting to sound the alarm about a bubble in the market, and particularly in tech stocks, similar to the one that formed before the dot-com crash in 2000.

What we're hearing: The bubbling IPO market in 2020 also is starting to look familiar.

  • "You see similar levels of companies with no earnings, so basically speculative investments, coming to the IPO market as we had in 1999–2000," Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America, said during a recent presentation.
  • "This is another warning sign that we’ve seen."
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