Han Dieperink: Why the stock market is different now than it was in 2000
This column was originally written in Dutch. This is an English translation.
By Han Dieperink, written in a personal capacity
Many investors are concerned. They believe that the stock market is now just as expensive as it was during the infamous internet bubble of 2000. But this comparison is flawed. Today's market is fundamentally different—and that justifies the higher prices.
Let's look at the facts. In 2000, tech companies were trading at insane prices. Cisco had a price-earnings ratio (P/E ratio) of 196. Intel was at 75, Microsoft at 70. Compare that to today: Apple is trading at a P/E ratio of 31, Microsoft at 34, Google at just 22. Even Nvidia, with its high P/E ratio of 58, is a bargain compared to the madness of back then.
The difference? The companies of 2000 made hardly any profit. Many internet companies didn't even have any revenue. Pets.com was valued at $300 million but went bankrupt within two years. Today's seven largest tech companies—Apple, Microsoft, Google, Amazon, Nvidia, Meta, and Tesla—together make more than $500 billion in profit per year.
A new economy with better business models
The economy has changed completely over the past 25 years. Companies such as General Electric and ExxonMobil used to dominate the stock market. They needed expensive factories to grow. Today's tech giants operate differently.
Microsoft, Apple, and Google achieve operating margins of more than 30%. Traditional industrial companies are already happy with 10%. An additional user of Google Search costs the company virtually nothing, but generates immediate revenue. These economies of scale did not exist in the past.
Moreover, these companies benefit from network effects. The more people use Facebook, the more valuable it becomes for everyone. These “winner-takes-all” situations create strong monopoly positions. Amazon Web Services, Apple's App Store, and Google's advertising network are modern toll gates that the entire economy must pass through.
Why higher prices make sense
Several factors are making higher valuations the new norm. First, interest rates have been structurally low for fifteen years. Pension funds and insurers have little choice but to invest in stocks to get sufficient returns. This creates constant demand for stocks.
In addition, passive investing has created a flywheel effect. More than half of the money in US stocks is in index funds that buy automatically, regardless of price. Every month, new money flows in through pension contributions and savings plans.
Investing has also become cheaper and more transparent. Commission-free trading and better access to information have removed the barrier to entry. Corporate governance has been strictly regulated since the accounting scandals of the early 2000s. All these factors justify structurally higher valuations than in the past.
Opportunities elsewhere
While everyone is looking at the tech giants, there are also alternative opportunities. Many traditional companies are trading at low valuations. Banks, utilities, and industrial companies are out of favor. History shows that these are sometimes the best times to get in.
The equally weighted S&P 500—in which each company counts equally—is trading at a reasonable P/E ratio of around 18. This shows that many companies, adjusted for the tech giants, are attractively priced.
Focus on quality, not valuation
The modern market requires a new way of looking at things. Professor Robert Shiller, famous for his warnings in 2000, acknowledges that old valuation models no longer work. The economy has changed too much.
The secret is simple: stop staring at P/E ratios and focus on company quality. Look for companies with sustainable competitive advantages, strong market positions, proven management, and stable profit growth. It doesn't matter whether those companies are in the “new” or “old” economy. Because ultimately, it's not valuations that make you rich, but companies that grow their profits year after year.
The bottom line
Yes, the market can always correct itself. That's just the way it is. But the underlying economy is stronger than it was in 2000. Profitability is higher, business models are better.
The question is not whether the market is too expensive. The question is: which companies will still be market leaders in ten years' time? That's where the real returns lie – regardless of today's prices.