The stock market right now resembles the Y2K surge — and that didn’t end well

It can also produce reflections on how the past may give a clue to what comes next. Julian Emanuel, strategist at Evercore ISI, sees a similarity between the Y2K stock market surge of the late 1990’s and today’s market, though he acknowledges the standard caveat: history seldom repeats but often rhymes.

“The unrelenting momentum that has carried the S&P 500 to the round number of 5,000 has few equals in history, the standout example being the internet fueled rally off a similar market bottom in October 1998 versus the pivotal October 2022 low,” says Emanuel in a note sent to clients this week.

To recall, the Y2K phenomenon occurred during the nascent dot-com boom, when some technology stocks got extra propulsion from expectations companies would spend gazillions ensuring their computer systems could switch to 2000 when the new millennium began. Do we have a similar frenzy regarding AI?

Here’s Emanuel’s chart showing the S&P 500’s trajectory from those October lows he’s citing. If the rhyming is rich then today’s market may struggle to make much more headway in this cycle.

Emanuel is quick to note the differences. Today’s valuations may be stretched at 22 times trailing twelve month earnings, but that’s well below the 28 times seen at the Y2K/dot-com bubble top.

And after the Y2K/dot-com bubble burst in early 2,000 there was a spike in weekly initial jobless benefit claims a full year ahead of the 2001 recession. Current unemployment claims of around 210,000 and stoic consumer confidence data suggests little sign of such stress just yet.

However, he’s still worried by the similarities between now and then. “The price parallels, the positive feeling around the long term potential of generative AI and investors’ new found confidence that money can be made in stocks – as it was in 1999 – despite a 10 year Treasury yield solidly affixed to 4%+, continues to expose equities to inflation, earnings and Fed policy disappointments,” says Emanuel.

Indeed, he thinks the market’s present ‘Goldilocks’ valuation paradigm is consistent with forward average stock returns of zero percent, regardless of whether a recession is averted or not.

Consequently he favors defense. “We maintain our year end S&P 500 price target of 4,750 and reiterate our preference for communications services, consumer staples, and health care, sectors which have historically outperformed in the time from the Fed’s last hike to the first rate cut,” says Emanuel.

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