Markets and Economy Case for a healthy market rotation vs. a tech bubble

It’s tempting to draw parallels between today’s market and the late 1990s, especially in the wake of Alan Greenspan’s passing and the recent selloff in technology stocks. But the comparison doesn’t hold up well. Investors may want to see echoes of the tech bubble in every pullback, yet this environment looks far healthier and far more balanced than the one that preceded the dotcom bust. Greenspan’s era was defined by a runaway surge in technology stocks¹ and a Federal Reserve (Fed) that tightened policy into the rally.² Today’s setup is different. The rotation beneath the surface is likely broader, and the economic backdrop is likely more stable. This isn’t 1999.

Tech rotation

Technology stocks have certainly lost momentum in recent weeks,³ but context matters. The S&P 500 Information Technology sector is still up about 15% this year.⁴ That’s a strong return by any historical standard, even if it has cooled from earlier peaks. What’s more interesting is that this strength has occurred while the Magnificent 7 have been selling off in aggregate.⁵ The leadership within technology has shifted from the hyperscaler companies such as Alphabet, Amazon, Meta, and Microsoft, that have committed to significant AI-related investment, to companies that are benefiting from their investment.⁶ To me, that’s a rotation, not a breakdown.

Broadening market performance

The rotation isn’t limited to technology. The other 493 companies in the S&P 500 Index have had positive performance in June and are up more than 14% year to date.⁷ This is exactly the broadening of market performance that many investors were hoping for in 2024 when the market was criticized for being too concentrated. Industrials, real estate, and financials have all delivered strong performance over the past three months.⁸ Small-cap indexes are at all-time highs.⁹ These aren’t the signs of a fragile market to me. They’re the signs of a market that’s likely expanding its base of support.

Technology has been experiencing a period of June gloom, but that could easily reverse as earnings season approaches. Even if the sector is consolidating after a strong run, that isn’t inherently negative. Consolidation may be healthy, especially when other parts of the market have been stepping up. A market that relies on a handful of megacaps may be vulnerable. A market that rotates leadership may be resilient.

Declining inflation expectations

The second concern is inflation and the fear that Fed Chair Kevin Warsh could raise rates, ending the cycle in a manner reminiscent of Greenspan in 1999. That fear is overstated in my view. The shape of the yield curve has indicated that policy is already restrictive,¹⁰ which to me means the hurdle for additional tightening may be high. Oil prices have fallen sharply¹¹ and inflation expectations have declined.¹² Memory prices have been rising,¹³ which has made laptops and tablets more expensive, but that category represents a small portion of the consumer basket. Inflation breakevens can be a reliable guide, and they’ve pointed to moderation rather than acceleration.¹⁴

Greenspan’s warning about irrational exuberance was early. Today doesn’t feel like a moment of excess to me. It feels like a market undergoing a healthy rotation that appears more likely to remain on hold than to tighten into weakness. Investors may be tempted to see ghosts of past bubbles, but in my view, the evidence points to a very different story.