Zhongjin: A comparison with the internet bubble Has the "bubble" of the US stock market burst?

Where did the US stock market fall to? On the index level, the S&P 500 and Nasdaq indices have both fallen 10% and 14% respectively from their historical highs. After a recent rapid pullback, both have fallen to around the annual support levels of 5600 and 17700, consistent with our previous expectations. From a sentiment indicator perspective, both the S&P 500 and Nasdaq indices are already oversold. In terms of valuation, the S&P 500 dynamic P/E ratio has fallen to 20 times, down 11% from the end of 2024; the Nasdaq dynamic P/E ratio has fallen to 24.6 times, down 19% from the end of 2024. Leading stocks have experienced even greater declines, with an average pullback of over 20% in the technology sector. High-valuation stocks like Tesla, Inc. have even fallen nearly 50% from their historical highs. The market value of the top 7 US leading stocks has dropped to 26%, which is still higher than the 22% before the bursting of the internet bubble, but the 21% profit proportion is much higher than the previous 9%. In comparison, the market value proportion of the top 10 Hong Kong stocks is 28%, higher than the US, but the profit proportion is only 18.2%. Therefore, it can be seen that US stock valuations are still not particularly cheap, but some of the bubble has already been squeezed out. What lessons can be learned from the internet bubble in this current market trend? If we use a simple historical comparison like the one above, we may not fully capture the characteristics of this market driven by individual leading stocks and industry trends. Since 2023, the 7 technology leading stocks in the US stock market have risen by 133%, but excluding these 7 companies, the S&P 500 and Nasdaq have only risen by 25% and 31%, respectively. Thus, the so-called "success of the leading stocks, failure of the leading stocks" is similar to the market driven by leading stocks and technology trends in the internet bubble period. We compare the current situation with the peak of the 2000 bubble, looking at the macro background, industry trends, and market structure before the bubble formed, and found that the current level of bubbles is not extreme, more similar to the pre-internet bubble years of 1997-1998. Starting from the introduction of ChatGPT at the end of 2022, this round of AI market has been going on for over 2 years, with Nasdaq rising by up to 93%. During this period, earnings contributed 46% and valuations contributed 32%. The last internet market lasted nearly 9 years and can be divided into: 1) a mild upward period from 1991 to 1994 (CERN released the first publicly accessible webpage, marking the official transition of the internet from research and military to the public, during this phase, Nasdaq rose by 65%, earnings contributed 101%, valuation dragging down by 18%); 2) a rapid upward period from 1995 to July 1998 (the listing of Netscape marked the beginning of commercialization of the internet, with a rise of 168% during this phase, earnings contributed 61%, valuations contributing 66%); and 3) the bubble period from October 1998 to early 2000 (Nasdaq rose by 256% in just over a year, with valuations contributing 193% and earnings contributing only 21%). It can be seen that the market's biggest bubble stage is usually the last one or two years (almost entirely led by valuations), even after Greenspan warned of the market entering an "irrational exuberance" in 1996, tech stocks continued to rise for another 4 years before the bubble burst. In comparison, the current market trend, so far, is still mainly driven by earnings rather than simply "pulling up valuations", making the foundation of the rise more solid. How does a bubble form? Loose monetary policy, industry policies driving investment growth, and "irrational" market behavior Not all bull markets necessarily evolve into hard-to-end bubbles, even the Nasdaq in the initial mild and accelerated upward phase had fundamental support. The reason it eventually developed into a bubble was due to the three factors that contributed to the formation of the bubble at that time: Macro factors: Loose monetary policy, inflow of foreign capital into the US. From June 1995, the Federal Reserve cut interest rates three times in a row, although there was a small rate hike in March 1997 to combat inflation, it was paused after the ASIA FINANCIAL crisis outbreak, and subsequently, along with the decline in inflation, there were three consecutive rate cuts in 1998. In addition, after the outbreak of the ASIA FINANCIAL crisis, the relative growth advantage of the US attracted global capital inflows. Net fund flows into US stocks under the financial account item turned net inflows from the first quarter of 1997, and continuously increased until the first quarter of 1998, with a cumulative inflow of $43 billion. Although the current interest rate cut cycle did not start until September 2024, the repeated expectations of interest rate cuts since 2023 have already made the overall monetary environment relatively loose. After the risk exposure of Silicon Valley Bank in March 2023, the market once expected 3-4 rate cuts for the whole year, but the Fed's timely response prevented the further spread of bank risks, and the rate hike cycle continued until July 2023. In the year between the end of the rate hike and the start of the rate cut in September 2024, the expectations of rate cuts rose twice at the end of 2023 and the third quarter of 2024, pushing down US bond yields to lows of 3.8% and 3.6%, respectively, showing the early manifestation of a loose monetary environment. Industry factors: Industry policies support investment growth, but infrastructure growth also sparks overinvestment. In 1996, the Clinton administration enacted the Telecommunications Act with the aim of promoting broadband and internet development, and loosened entry restrictions in the telecom market. As a result, companies like Global Crossing and WorldCom invested about $30 billion starting in 1996, laying about 90 million miles of fiber optic cable. However, by 2001, the utilization rate of fiber optic cables was only around 5%, showing the issue of excess capacity and overinvestment. The current AI industry trends are similarly supported by policies, whether it is the "Chip Act" issued by the Biden administration or the "Stargate" plan launched by Trump, both have driven an increase in investment scale. Information technology equipment and R&D investments began to rise against the trend from the fourth quarter of 2023, and by the end of 2024, the investment scale related to AI technology had increased to 6.9% of GDP's investment scale. Micro factors: Irrational pursuit by institutional and individual investors. 1) Venture capital poured into the information industry, with venture capital investments into the information industry increasing by 178% and 128% year-on-year in 1999-2000, with information industry attracting $64.4 billion in venture capital in 2000. In summary, the original text discusses the current state of the US stock market, comparing it to historical events, especially the internet bubble of the early 2000s. It analyzes the factors contributing to the market conditions, including valuation, industry trends, and policy support. The text also examines the formation of bubbles in both periods and the lessons that can be learned from past experiences.1) 64% of the total venture capital in the United States. 2) A large number of IPOs that were not profitable and had unstable business models were highly sought after in the market. In the peak year of 1999, there were 370 technology companies listed, accounting for nearly 80% of the total in the United States that year, raising a total of $33.5 billion, which accounted for 52% of the US stock market. However, only 14% of these technology companies were profitable, yet the median increase on the first day of trading reached an astonishing 87%. 3) Residents' asset allocation quickly shifted towards stocks, with the percentage of stocks and mutual funds rising from 12.3% in 1995 to 22.5% in the first quarter of 2000. The capital gains tax reduction in 1997 also contributed to this trend. In addition, there were accounting manipulations and financial fraud in some listed companies at the time, and the misleading investment advice from some analysts also exacerbated the market's irrational behavior.Looking back at the current situation, the primary market is more rational. The scale of venture capital investment has slowed down, with the US venture capital scale dropping significantly to $67 billion in 2023 from $173 billion in 2022. The proportion of technology stocks' IPOs is also not as high as during the bubble period, with the IPO quantity and financing amount accounting for 18% and 25% respectively in 2024. The median increase on the first day of tech stock listing is 43%, but the percentage of profitable companies is 23%, higher than the 14% in 1999. The commercialization path of unicorn companies is clearer, with many companies already having clear business models and relatively stable revenue, such as OpenAI and Databricks, whose annual revenue has exceeded $1 billion. The proportion of residents' stock allocation is close to a historical high, with stocks and mutual funds accounting for 26.3% of residents' total assets, close to the historical high of 26.4%, which is higher than the internet bubble in this aspect. How did the bubble burst? Changes in monetary policy, global funds flowing to other markets, exposure of risks from star companies Reason 1: Inflation triggering Fed rate hikes, tightening monetary policy. The Fed began raising rates in June 1999 in response to inflation, ending in May 2000 with a total of 175 basis points over 6 rate hikes. During this period, the long-term US bond rate rose from 5.6% to 6.8%. Although the stock market was not significantly impacted by the rate hikes at first, the continuous tightening of monetary policy inevitably put pressure on market liquidity, leading to the Nasdaq finally peaking at the end of this rate hike cycle. Currently, the US rate hike pace has slowed down, but rate hikes are not absent. Under the benchmark scenario, we estimate that inflation may continue to decline until May, and the Fed still has room for rate cuts, with possibly two rate cuts for the year according to the natural rate of interest. However, Trump's tariffs and immigration policies have increased market concerns about supply-side inflation, and short-term inability to disprove this has caused recent market volatility. Reason 2: The ASIA FINANCIAL crisis gradually subsided, and global funds gradually flowed back to non-US markets. During the ASIA FINANCIAL crisis in 1997, funds flowed out of emerging markets massively back to the US due to safe-haven demand. But as the crisis gradually subsided, market panic significantly eased, with funds flowing out of emerging markets slowing down on the margin even showing some inflow, resulting in the rebound of emerging market currencies and a decline in the US dollar. The trend of recent foreign capital inflows has not completely reversed yet, as EPFR-calculated overseas active and passive equity funds have continued to flow into US stocks, but narratives from DeepSeek and European fiscal policy may loosen the trend of global capital inflows into US stocks, requiring further observation of changes. Reason 3: Exposure of risks from star companies hits confidence. The Nasdaq index fell from its peak in March 2000, with one of the trigger factors being the Microsoft Corporation, one of the leading companies at the time, being found in violation of antitrust laws, causing a 14% drop in its stock price in a single day, dragging the index down by 7.6%, and further dropping by 42% in the following two months, affecting the overall market. In addition, lower-than-expected financial performance reports in 1999 also exacerbated the selling of technology leaders. The current effect of technology leaders is even more pronounced. Leading technology companies, represented by NVIDIA Corporation, (Magnificent 7), have basically dominated market performance to a certain extent, also representing the "barometer" of the US AI industry trend. DeepSeek's low cost has sparked market concerns about the rationality of large-scale capital expenditure by leading companies, although the capital expenditure engine has not "shut down" yet, continuous attention is needed on the investment expectations and profit realization of technology leading companies in the future. Where is this round of AI market heading towards? It is akin to the early stages of the bubble formation in 1997~1998 Apart from macro and industry trends, from a market microstructure perspective, this round of AI market is more similar to the early stages of the bubble formation in 1997~1998, which does not necessarily mean it will evolve into a bubble, as the excitement level has not reached the peak of the 2000 bubble. Specifically, Performance: The rate of increase is close to 1995~1998, with the annualized return of the Nasdaq index since the beginning of 2023 approaching 30%, which is comparable to the 32% level during the rapid rise period of 1995~1998, but significantly lower than the 144% during the bubble formation period of 1999~2000. Market DRIVE is also similar to 1995~1998, with EPS continuing to rise, contributing 61% to the 168% increase in the Nasdaq index, while valuation contributes 66%. EPS has been growing steadily since the end of 2023, with dynamic P/E ratio fluctuating between 27~28 times, contributing 46% to the profit and 32% to the valuation. Concentration: The effect of technology leaders far exceeds that of the internet era, but matches more with net profits. The market value of leading technology stocks in this round has risen to a high of 28%, although it recently dropped to 26% but still higher than the 22% peak before the bursting of the internet bubble. A high market value ratio does not necessarily indicate a bubble, as in terms of matching with profit ratio, the net profit of leading technology companies in this round accounts for 21% of the US stock market, significantly higher than the 9% at the end of 1998. Valuation: The peak is close to the early stages of the 1998 bubble. 1) The dynamic valuation peak of the S&P 500 is close to the early stages of the 1998 bubble, although the dynamic valuation of the S&P 500 has dropped from 22.6 times to 20.6 times recently, it is closer to the level of November 1998 even compared to the previous peak of 22.6 times. Considering the impact of interest rates and growth environment on valuation, measuring the risk premium of the S&P 500 relative to cost and return rate, the current 5.94% is far less extreme than 2.53% in 2000. 2) The valuation peak of technology leading stocks is also close to the early stages of the 1998 bubble. Measured by P/E ratio, static and dynamic levels are 37 times and 31 times respectively, significantly lower than 65.8 and 63.4 times in March 2000. Profit: Growth rate is close to the rapid rise period of 1997~1998, and the proportion is much higher than during the internet bubble period.1) In terms of revenue growth, the growth rate of leading technology companies has stabilized at around 13% since the third quarter of 2023, similar to the level in 1998; the proportion of revenue in the US stock market continues to rise, reaching 9.2% in the fourth quarter of 2024, higher than the peak of 3.1% at the end of 1998. 2) Net profit growth is close to that of 1997. The profit growth of leading technology companies in this round peaked at the end of 2023 but still maintained around 26%; the proportion of net profit in the US stock market continues to rise to 21%, much higher than the peak of 9% at the end of 1998. 3) Cash flow growth is close to that of 1997. The growth rate of operating cash flow slowed down from 33% in early 2024 to 24%, showing a trend and level similar to that of 1997 to 1998; however, the proportion of operating cash flow in the US stock market increased to 28%, higher than the 5.7% at the end of 1999.Further intensified after 1998.How is the bubble formed? Loose monetary policy, industry policies driving growth, market "irrationality" Macro factors: Loose monetary policy, inflow of foreign funds into the US The loose monetary policy provides liquidity. The Federal Reserve began lowering interest rates in 1995, with three consecutive cuts in the federal funds rate from 6% to 5.25% starting in June 1995. Although the Fed raised rates slightly in March 1997 after a small increase in inflation, the ASIA FINANCIAL crisis that year led to a temporary halt in the rate hike process. Subsequently, due to significant decrease in inflation, the Fed lowered rates continuously three times from 5.5% to 4.75% until it began a new cycle of rate hikes in June 1999. During this period, the year-on-year growth rate of M2 money supply surged from 0.5% in March 1995 to a peak of 8.5% by the end of 1998. The relative growth differential in the US attracted funds. In 1997, the Asian Financial Crisis broke out, leading to substantial depreciation of Asian emerging market currencies. At the same time, the economic prosperity in the US and the booming stock market had a significant attraction for global funds, which accelerated the flow of funds back to developed markets like the US, resulting in a sharp appreciation of the US dollar. Fund flows into US stocks under the financial account turned net inflows starting in the first quarter of 1997 and continued to increase until the first quarter of 1998, with a total inflow of $43 billion. Although the current rate cut cycle did not begin until September 2024, the repeated expectations of rate cuts since 2023 have already made the overall monetary environment relatively loose. After the risk exposure of Silicon Valley banks in March 2023, the market once expected 3-4 rate cuts throughout the year, but the timely response of the Fed prevented the further spread of bank risks, and the rate hike cycle continued until July 2023. In the year between the end of the rate hikes and the start of the rate cuts in September 2024, rate cut expectations heated up twice at the end of 2023 and in the third quarter of 2024, leading to a decline in US bond yields to lows of 3.8% and 3.6% respectively, demonstrating an early easing effect on the monetary environment. Charts 4: Federal Reserve monetary policy tightening starting in 1994, but then shifted to loose in 1995, and further rate cuts in 1998 Chart 5: Net inflows of funds in the financial account when the bubble burst in 2000 were more than 10 times those in early 1996 Industry factors: Industry policies supporting investment growth, but also triggering overinvestment Industry policy support drives investment growth, but infrastructure growth has also led to overinvestment. In 1996, the Clinton administration issued the Telecommunications Act aimed at promoting broadband and internet development, and loosened access restrictions in the telecommunications market. As a result, companies like Global Crossing and WorldCom invested around $30 billion starting in 1996, laying about 90 million miles of fiber optic cable. However, by 2001, the utilization rate of fiber optic cables was only around 5%, indicating overcapacity and overinvestment issues. The current AI industry trend is also supported by policies, whether it is the "Chip Act" issued by the Biden administration or the "Stargate" program set up by Trump. These have driven an increase in investment scale, with year-on-year growth rates of information technology equipment and R&D investments starting to rise against the trend in the fourth quarter of 2023, reaching 6.9% of GDP by the end of 2024. Chart 6: Investment related to information technology development from 1995 to 2000, averaging 0.84 percentage points of actual GDP growth Micro factors: Irrational pursuits by institutional and individual investors Primary market: Venture capital influx and hot IPOs, but current more rational Venture capital poured into the information industry, with a surge in risk investments to the information industry in 1999-2000, with a year-on-year increase of 178% and 128% respectively. In 2000, the information industry attracted $64 billion in venture capital, accounting for 64% of the overall US venture capital market. At the same time, high-tech companies aggressively entered the merger market to pursue rapid and efficient expansion. For example, in November 1998, AOL announced a $42 billion acquisition of Netscape, resulting in a 34.1% increase in Netscape's share price. In January 2000, AOL announced a $164 billion acquisition of Time Warner, one of the largest mergers in US history, causing a 42.4% increase in AOL's share price on the day the news was announced. Many unprofitable and unstable business model IPOs were highly sought after in the market. During the internet revolution, there was a surge in tech company IPOs. Between 1994 and 2000, a total of 3,154 companies went public in the US, with 1,514 of them being tech companies. At the peak in 1999, 370 tech companies went public, accounting for nearly 80% of the companies listed that year in the US, raising $33.5 billion, or 52% of the US stock market. During the bubble formation period of 1998-2000, most newly listed companies were not profitable, but were still highly valued by the capital markets. Even prefixes like "e" or suffixes like ".com" in company names would have a significant impact on stock prices. Many of these newly listed companies were still in their early stages, with no stable revenue or business model. For example, tech companies that went public in 1999 had an average founding age of only 4 years, and only 14% of them were profitable, but the median gain on the first day of trading was a staggering 87%. Charts 7: The information industry attracted $64 billion in venture capital in 2000, accounting for 64% of the overall US venture capital market Charts 8: In the peak year of 1999 IPOs, nearly 80% of the 476 companies listed were tech companies, with the proceeds accounting for 52% of the US stock market Charts 9: Tech companies that went public in 1999 had an average founding age of only 4 years, and only 14% of them were profitable Charts 10: Only 14% of profitable tech companies went public, but the median gain on the first day of trading was a staggering 87% On the contrary, the primary market is currently more rational. Venture capital has a more cautious approach to the information industry, and IPOs are less hot.The scale of investment is slowing down, with the size of venture capital in the United States expected to be $67 billion in 2023, a significant drop from $173 billion in 2022. The proportion of technology stock IPOs has decreased significantly, with the number and financing amount of IPOs in 2024 accounting for 18% and 25% respectively, much lower than the levels during the 1998-2000 bubble period. The median first-day increase for technology stock listings is 43%, but the proportion of profitable companies is 23%, higher than the 14% in 1999, indicating that investors are investing in technology stocks more rationally rather than blindly chasing them.The commercialization path of Unicorn companies is clearer. Compared to the situation in the capital market in the year 2000 when many companies with short establishment times and immature business models and unstable incomes flooded in, tech companies entering the capital market now have become more mature, valuations are more focused on technological barriers and application scenarios, and many companies already have clear business models and relatively stable incomes, such as OpenAI and Databricks, with annual revenues exceeding $1 billion. Resident allocation: the proportion of stocks and mutual funds in total assets has doubled and is currently close to historical highs Residents' asset allocation is accelerating towards stocks. Since 1995, the proportion of stocks and mutual funds in residents' major asset allocation has been steadily rising from 12.3% to 22.5% in the first quarter of 2000, while the proportion of real estate has fallen from 28% to 25% during the same period, and the proportion of deposits and cash has decreased from 8.8% to 6.6%. In 1997, the US Congress passed the Taxpayer Relief Act of 1997, aimed at reducing the tax burden on individuals and businesses, including lowering the highest tax rate on long-term capital gains from 28% to 20%, also accelerating the flow of funds into the stock market by residents. Currently, the proportion of stocks in residents' allocation is close to historical highs, with stocks and mutual funds accounting for 26.3% of residents' total assets, which is close to the historical peak of 26.4%, therefore short-term market fluctuations have a greater impact on residents' income expectations and consumption. Chart 11: Since 1995, the proportion of stocks and mutual funds in residents' allocation has been steadily rising from 12.3% to 22.5% in the first quarter of 2000. How did the bubble burst? Monetary policy shifts, global capital outflows, exposure of star company risks Inflation increased, triggering the Federal Reserve to raise rates and tighten monetary policy Inflation increased, triggering the Federal Reserve to raise rates and shift towards tighter liquidity. In June 1999, the Federal Reserve began raising rates to combat inflation, ending in May 2000 with a total of 6 rate hikes totaling 175 basis points, during which long-term US bond yields rose from 5.6% to 6.8%. Although the stock market was not significantly affected at the beginning of the rate hikes, the continued tightening of monetary policy inevitably brought pressures on market liquidity, and the Nasdaq finally peaked at the end of this rate hike cycle. The pace of rate cuts in the US has slowed, but rate hikes are not imminent. Under normal circumstances, we estimate that inflation will continue to decline until May, the Federal Reserve still has room to cut rates, according to the natural rate of interest, there may still be two rate cuts for the whole year. However, fears regarding supply-side inflation caused by Trump's policies on tariffs and immigration have increased, and the short-term inability to disprove this has also led to recent market volatility. Chart 12: Expectations of rate cuts have fluctuated since last year Gradual easing of the ASIA FINANCIAL crisis, global funds gradually flowing back to non-US markets The ASIA FINANCIAL crisis is gradually easing, and global funds are gradually flowing back to non-US markets. During the ASIA FINANCIAL crisis in 1997, funds fled emerging markets on a large scale for safety and flowed back to the US. However, as the crisis gradually eased, market panic subsided significantly by 1999, and the phenomenon of large-scale outflows from emerging markets during the crisis period slowed down at the margin, and even some inflows were observed, manifested in the recovery of emerging market currencies and the weakening of the US dollar. The trend of recent overseas capital inflow has not completely reversed. The continuous influx of global funds into the US is due to the unmatched attraction of the AI industry, with funds constantly flowing in through the capital account, elevating the US dollar, helping the US finance its debts, forming a positive feedback loop, and offsetting the large deficits in the current account. However, the emergence of DeepSeek, the reduction of the US fiscal deficit, and changes in the situation of GEO Group Inc all affect the global narrative, and risk premiums reflect an emotional aspect where there is now an "eastward rise and westward fall," but according to EPFR-calibrated statistics, overseas active and passive equity funds have continued to flow into US stocks. Chart 13: Changes in the narrative lead to market sentiment "eastward rise and westward fall" Chart 14: Foreign active and passive equity funds have cumulatively flowed into US stocks by $294 billion since 2020 Confidence shaken by the exposure of risks in star companies Microsoft Corporation (MSFT.US) was found to have violated antitrust laws, severely impacting investor sentiment. In October 1997, the US Department of Justice filed a lawsuit against Microsoft Corporation for bundling sales of the IE browser, beginning a legal battle that lasted over 3 years. A significant turning point came in April 2000. On April 1st, Judge Posner, who was responsible for mediating between the Department of Justice and Microsoft Corporation, announced that the mediation efforts had failed. Subsequently, on April 3rd, Judge Jackson ruled that Microsoft Corporation had violated antitrust laws, causing the stock price of Microsoft Corporation to plummet by 14% on the same day, dragging down the Nasdaq index by 7.6%. Over the next two months, the stock price of the major weight Microsoft Corporation dropped by 42%, rapidly declining and affecting market performance. The current tech leader effect is more pronounced, with tech leaders (Magnificent 7) led by NVIDIA Corporation, basically dominating market performance, to a certain extent also representing the "weathervane" of the trend in the US AI industry. DeepSeek's low cost has triggered concerns about the rationality of the heavy capital expenditure by leading companies, although the capital expenditure engine has not yet "burned out" as of now, upcoming attention needs to focus on the investment expectations and profit realization of tech leading companies. Where is this AI market heading to in this particular period? The initial period of the bubble formed in 1997-1998 Performance: Growth rate and market DRIVE close to 1995-1998 Nasdaq rises rapidly, outperforming other major indices. Since the beginning of 2023, The trend of the AI industry is driving the US stock market index higher, and it has repeatedly reached new highs against the backdrop of rising US bond interest rates. As of March 14, 2025, the tech-heavy Nasdaq index (70%) has significantly outperformed the S&P 500 (47%) and the Dow Jones (25%) indices, with an annualized return of 27%, approaching the rapid rise of the internet revolution.But unlike the period of the Internet bubble, the main driver of this round of growth has been profit contribution. The Nasdaq index reached its highest increase of 93% by the end of 2024, with a profit contribution of 46% and a valuation contribution of 32%, while the S&P 500 and Dow Jones indices have seen increases mainly driven by valuation expansion. This further indicates that the current macroeconomic growth environment has not seen a universal improvement, and it is more of a case of the technology industry standing out. Specifically, the implied EPS has been continuously growing since the end of 2023, while the dynamic P/E ratio has been oscillating between 27-28 times before a recent pullback, close to the profit and valuation trends of 1995-1998. Chart 15: This round of AI market has lasted for over 2 years, with the Nasdaq index reaching its highest increase of 93%, and as of March 14, 2025, the increase was 70%. Concentration: The dominance effect far exceeds the Internet era, but with a higher matching degree to net profit The market capitalization of this round's technology leaders accounts for 26% of the overall market. During the Internet revolution, the major weighted companies in the US stock market went through a transition from traditional blue-chip stocks to technology stocks, with a shift from hardware represented by IBM to software represented by Microsoft Corporation, Cisco Systems, Inc., and Intel Corporation. At the peak before the bursting of the Internet bubble in 2000, the total market capitalization of the seven major technology leaders, including Microsoft Corporation, Amazon.com, Inc., Intel Corporation, IBM, Cisco Systems, Inc., Oracle Corporation, and eBay accounted for about 22% of the US stock market, doubling the market capitalization ratio during the bubble formation period from 1998 to 2000. On the other hand, in this round of AI market, the market share of technology leaders represented by the Magnificent 7 once rose to 28%, although it has dropped to 26% recently, it is significantly higher than the low point of 15% at the beginning of 2023, reflecting a more prominent dominance effect in the current US stock market, where market performance relies on the continuous innovation and profitability of a few companies. The combined weight of the top ten stocks has risen from 25% during the Internet revolution to 38%. From the perspective of the top ten weighted stocks in the index, this round of AI market also shows an increasing concentration in the market. Looking back at the year 1999 during the Internet bubble, the top ten weighted stocks in the S&P 500 index accounted for 25%, while by the end of 2024, this proportion had further risen to 38%. The dominance effect in this round of the market is more pronounced in the US stock market. At the index level, the S&P 500 index has outperformed the S&P 500 equal-weight index in both rounds of technology trends. Looking at individual stocks, during the Internet revolution period from 1995 to 2000, technology leaders contributed 40% to the market performance, with top 15 stocks like Microsoft Corporation (15.6%), Cisco Systems, Inc. (15%), Intel Corporation (12%) contributing 282% to the S&P 500 index's increase of 40%; since 2023, during the AI market trend, technology leaders have contributed 70%. As of March 14, 2025, top 15 stocks like NVIDIA Corporation (7.7%), Amazon.com, Inc. (3.7%), Apple Inc. (3.4%) have contributed 72% to the increase of the S&P 500 index. Chart 16: The concentration of this round's technology leaders is higher, with the highest market capitalization accounting for 28% of the US stock market, recently dropping to 26%. Valuation: The peak is approaching the early stage of the bubble Index valuation: The peak is approaching the early stage of the bubble at the end of 1998 Upon vertically comparing the valuation levels of the main US stock market indices, we find that the current valuation levels are significantly higher than the average levels across different indices, different indicators, and different time periods. Specifically: From a static valuation perspective, the S&P 500 index is approaching bubble levels. As of March 14, 2025, the S&P 500 static P/E ratio was 24.1 times (previous high on April 29, 2021, 33.4 times), putting it in the 80th percentile since 1999, higher than the average of 20 times since 1990. The current static P/E ratio of the Nasdaq is 35.2 times (previous high on December 28, 2020, 81.4 times), higher than the average since 2001 by 1 standard deviation, putting it in the 70th percentile. However, static valuation has its limitations as it does not consider future earnings expectations, which may present an upward bias in growth prospects similar to Hershey Company, so further consideration of dynamic valuation is necessary. From a dynamic valuation perspective, the S&P 500 index is approaching bubble levels. As of March 14, 2025, the S&P 500 dynamic P/E ratio is 20.5 times (previous high on September 2, 2020, 23.4 times), also higher than the average of 16.5 times since 1990 by 1.8 standard deviations, putting it in the 82nd percentile of historical data. Additionally, the dynamic valuation of the Nasdaq (25.2 times) is higher than its historical average (22.3 times), indicating that even considering future earnings expectations, the valuations of US stock indices are not cheap. Considering factors such as interest rates and the growth environment, especially cost and relative changes in returns, current US stock valuations are not as "extreme" as they may seem and may even be undergoing a trend. Introducing a relative perspective of actual vs. natural interest rates to calculate the equity risk premium. The S&P 500 index equity risk premium (measured by the LM model) is 5.94%, which is far from being as extreme as the 2.53% seen during the Internet technology revolution in 2000. Chart 17: From the relative perspective of actual vs. natural interest rates, the equity risk premium is much milder Valuation of leading stocks: Approaching the early stage of the bubble in 1998, supported by profit resilience Focusing further on the valuation of technology leaders during the Internet revolution and this round of AI marketStocks, their valuation is still a distance from the level of "bubble". Taking into account market capitalization, contribution to stock price changes, and industry attributes, we select Amazon.com, Inc., Microsoft Corporation, Intel Corporation, IBM, Cisco Systems, Inc., Oracle Corporation, and eBay as the leading stocks of the Internet Revolution era, to compare their valuation with the current tech leaders (the Magnificent 7) from a valuation perspective.Looking at the price-to-earnings ratio, it is approaching the bubble stage at the end of 1998. From a static perspective, the price-to-earnings ratio of leading technology stocks reached a high point of 37 times at the beginning of 2024, which is close to the level of November 1998, and has recently fallen to 31.4 times (as of March 14, 2025). From a dynamic perspective, the price-to-earnings ratio of leading technology stocks reached a high point of 35.4 times in July 2024, which is close to the level of December 1998, and has recently fallen to 26.5 times. Looking at the price-to-sales ratio, it is approaching the bubble period at the end of 1999. Considering that technology companies during the internet revolution were often in the early stages of no profit, from the perspective of the price-to-sales ratio, both the static (9.3) and dynamic (8.2) price-to-sales ratios of this round of leading technology stocks are close to the bubble period levels of the end of 1999, and have recently fallen to 8.0 times and 6.8 times respectively. Whether the price-to-sales ratio is reasonable depends on whether revenue can be converted into profit. Currently, AI technology has gradually realized profits at the application level, which is different from the pure "growth narrative" of the internet revolution period, so there is no need to worry too much about seemingly high price-to-sales ratios. Looking at other indicators, such as P/B, EV/EBITDA, and EV/Sales, the EV/EBITDA and EV/Sales levels of this round of leading technology stocks are lower (median 17.2 vs. 55.9, 7.7 vs. 14.9), showing that the current leading companies are more stable in creating profits and cash flow. The static P/B is higher than that of the leading internet revolution period stocks (median 8.9 vs. 8.0), which may indicate that current intangible assets such as research and development, software, etc. are difficult to fully reflect in net assets. Profit: The growth rate is close to the fast upward trend of 1997-1998, and the proportion is much higher than the internet revolution period. Leading technology stocks have contributed all the profit growth of the S&P 500 index since 2023, so whether it is the currently "seemingly" high valuation or the continuously rising market concentration, it is not completely "sourceless". Compared to the internet revolution period, this round of leading technology companies have resilience in terms of profit capabilities, growth quality, and cash flow health, and the growth rate and proportion are close to the fast upward trend of 1997-1998. Specifically: Revenue: The growth rate is close to that of 1998, and the proportion continues to rise. The quarterly revenue growth rate of this round of leading technology stocks has been steadily increasing since the first quarter of 2023, reaching a high point of 15.3% in the third quarter of 2024, and then slightly slowing down, but overall still maintaining rapid growth. In contrast, the revenue growth rate of leading technology companies during the internet revolution period peaked at 24% in the second quarter of 1999 before significantly declining, but stock prices continued to rise. Until the first quarter of 2000 when the bubble burst, the revenue growth rate had dropped to 7%. In terms of revenue proportion, the proportion of leading technology companies in this round of AI market has increased significantly, from 7.9% in the first quarter of 2023 to 9.2% in the fourth quarter of 2024. In contrast, during the internet revolution period, the revenue proportion of leading technology companies increased relatively slowly, from 2.6% in 1995 to a temporary high of 3.1% in the second quarter of 1999. Profit: The growth rate is close to that of 1997, and the proportion continues to rise. The net profit growth rate of leading technology stocks has been rapidly rising since the first quarter of 2023, accelerating from 3.2% to a high point of 70% by the end of 2023, and slowing down to around 26% by the fourth quarter of 2024. The profit proportion has continuously increased from 13% in 2023 to 21%, reflecting the strong profit capability of technology stocks. In contrast, during the internet revolution period, profit growth began to slow down in 1997, and in the first half of 1998, there were two consecutive quarters of negative growth, and the profit proportion also declined after reaching 9% at the end of 1998. Cash flow: The growth rate is close to that of 1997 and remains ample overall. The operating cash flow growth rate of leading technology stocks has slightly decreased from a high point of 33% in early 2024 to 24%, while the growth rate of internet revolution period stocks declined continuously from 1996 to a low point of 9.5% in the second quarter of 1998, and did not exceed the previous high point due to the low base effect. In terms of proportion, the cash flow proportion of internet revolution period stocks reached a high point of 6% at the beginning of 1998 before continuously declining, but in contrast, the cash flow proportion of this round of leading technology stocks is still increasing and has now risen to 23%. Ample cash flow supports corporate spending activities, and the capital expenditures of the seven leading technology stocks maintained a high growth rate of 59% in the third quarter of 2024, contributing 24% of the non-financial capital expenditures of the S&P 500 index. Emotions: Not yet at the level of exuberance seen during a bubble, but leverage levels and institutional clustering may amplify short-term fluctuations. Market sentiment: Not yet at the level of exuberance seen before a bubble bursts. The put/call ratio has not fallen to extreme levels. The total volume of put and call options contracts traded daily can be used to gauge market exuberance. During the bubble formation period from 1998 to 2000, the put/call ratio steadily declined, reflecting a market with more call options being bought and relatively exuberant market sentiment. Currently, the put/call ratio is also declining steadily, but has not yet fallen to the extreme levels seen from 1998 to 2000. This indicates that there is still some distance from the "irrational" sentiment before the bubble bursts. AAII individual investor sentiment has cooled significantly. Through weekly questionnaire sampling of individual investors' bullish/bearish sentiment for the next six months, the net bullish ratio began to rise steadily from the mid-1999s, reaching a historical relative high of 46% in January 2000, reflecting a high level of investment sentiment among individual investors. In contrast, the peak of individual investor sentiment in this round occurred at the end of 2023, and since 2024, the netThe bullish sentiment ratio continues to decline, as of March 13, 2025, it has dropped to around -32%, indicating a significant cooling of the overall market sentiment compared to the internet bubble period.Chart 21: The current bearish/bullish ratio is also continuing to decline, but has not fallen to the extreme levels seen in 1998-2000. Chart 22: Since 2024, the net bullish ratio of individual investors from AAII has continued to decline, and is currently at around -32%. Leverage Levels: Margin balances and open interest in options hit a historical high. Margin balances have significantly increased, leading to implied leverage levels reaching a historical high. Brokerage margin business statistics from FINRA can be roughly seen as a way for individual investors to leverage, and during the period from 1997-2000, the margin balance increased faster than the credit balance, with the implied leverage level reaching 1.85 before the bubble burst in March 2000. However, as of the latest data in February 2025, the margin balance of $918 billion is approaching the historical high of $935.8 billion in 2021, while the credit balance of $359.3 billion has returned to the level in early 2023, leading to an implied leverage level of 2.55, reflecting the current enthusiasm of individual investors in the U.S. stock market. Open interest in options has reached a historical high. Options can also achieve the goal of leverage, and institutional investors have higher participation. The open interest in long call options on the Chicago Board Options Exchange (CBOE) rose significantly to a historical high of 280 million contracts at the end of 2024, dropping to 251 million contracts in January 2025. However, the ratio of long to short positions has been continuously rising since February 2024 to February 2025, reaching 1.24 times, still below the 1.8 times seen in 2000. Institutional Holdings: Significant clustering effect among top institutions The proportion of market value of technology leaders' holdings has surpassed the post-epidemic peak. As of the fourth quarter of 2024, the top 20 U.S. active management institutions, excluding Berkshire Hathaway (which only holds Apple Inc. and Amazon.com, Inc.), all hold positions in MAAMNG (Meta, Apple Inc., Amazon.com, Inc., Microsoft Corporation, NVIDIA Corporation, Alphabet Inc. Class C), the six technology leaders. The proportion of holdings has continued to increase from 11.5% at the end of 2022 to 19.6% by the end of the fourth quarter of 2024, surpassing the post-epidemic high of 17%. At the individual stock level, NVIDIA Corporation's allocation has increased by 3.2% since the end of 2022, while Meta and Amazon.com, Inc. have also increased by over 1%. Chart 23: Margin balances approached historical highs again at the end of 2024, while credit balances fell, leading to a historical high implied leverage level of 2.5. Chart 24: The open interest in long call options on CBOE reached a historical high of 280 million contracts at the end of 2024, but the long to short ratio is lower than in 2000. This article is from the "Zhongjin Point" official account, GMTEight Editor: Jiang Yuanhua.