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The stock market's endless upside may excite investors to keep piling in, but equity conditions resemble those that preceded the tech crash of the early 2000's, JPMorgan outlined in a Tuesday note.
"When viewed in a historical context, parallels to the 'Dotcom Bubble' era are often dismissed due to the 'irrational exuberance' that characterized this period," analysts led by Khuram Chaudhry wrote, adding: 'Our analysis shows that while there are notable differences, they are far more similar than one may think!'
Here are six concerning signs that the modern market is not so different from the one that preceded the Dot-Com Bubble.
Market composition
The sector allocation of today's 10 largest stocks by market cap is worse than that of the dot-com period, when tech held an outsized dominance on the market, JPMorgan wrote. Current allocation is actually less diverse; there are now only four sectors represented across the top 10, compared to a historic average of six.
There's also less diversification amid the largest stocks themselves. For instance, just Apple and Microsoft make up 40% of today's top 10 names, while all the rest still share some tech theme exposure.
Factor exposure
Factor profiles between the two periods are "eerily similar," JPMorgan said.
Both in the early 2000's and today, the biggest names were characterized by high quality, rising momentum, and negative value. However, dot-com era stocks had higher growth exposure, which signals a more supportive backdrop compared to today, meaning stocks are more prone to risk right now.
"A good way to describe the current Top 10's factor profile would be 'Quality at a not so reasonable price,'" the note said.
Price performance
It's becoming increasingly likelier that the broader market today could soon outperform the top 10.
This commonly happens after an outperformance spike, like the one the largest stocks on the market enjoyed in 2023. The S&P 500's top seven firms alone were responsible for over 60% of the index's gains last year. But this year could bring a reversion to the mean, JPMorgan warned.
"Of course, mean reversion can also occur from data dropping out of the YoY time-frame; However, given the magnitude nature of recent moves as well as the extremes in equity positioning, we do expect equity market drawdowns to materialize, which may well be driven by weakness in the top 10," the note read.
Valuations
Extremely stretched valuations typically signal that market concentration is reaching its limits, JPMorgan outlined.
Though current top 10 price-earnings levels of 26.8x are nowhere near the dot-com's high point of 41.2x, today's biggest stocks require a much higher valuation premium than the rest of the market, even eclipsing extremes seen in the 2000s.
That's as the earnings yield spread between current leading stocks and the remainder of the index become the largest on record since 1994 in October.
Earnings-per-share
Compared to each of the largest 10 stocks' rising price, earnings have only had modest gains in the past few years, JPMorgan wrote. EPS weight is now at the same level as the dot-com peak. Unlike the 2000s-era market, today's top 10 appears to have no long-term growth advantage.
"While we would be hesitant to refer to the current levels of the Top 10 as a bubble, it would certainly appear that the Top 10 in the Dotcom era was backed by superior earnings developments," JPMorgan said.
