00:00 Speaker A
Let me break that down. So forward PE is just it’s what we call a multiple. It’s how expensive a stock is. How much money um is an investor today going to pay for a dollar of earnings tomorrow? So if I’m willing to pay $10 today for a dollar of earnings tomorrow, that gives me a multiple of 10. And in fact, right now, the tech and uh the tech and S&P 500 multiples are all are pretty close. They’re about 19 to 21.
00:27 Speaker A
But this chart shows that they have not always been close together. In fact, they’ve been pretty wide. And for most of the teens, they were going up pretty close to each other. Then around 2018, the tech landscape changed and we had a lot of recurring revenue in the SAS companies like Microsoft. That kind of changed a lot of things. And so we saw the tech multiple explode higher versus the S&P 500. So that by the uh in the early pandemic, there was a pretty big uh gap in there.
01:02 Speaker A
And that was due to the work from home trade and also a lot of industries just prioritizing cloud usage over everything else. And so that explains the gap. But what we find here is that there were very there was a huge gap only a year ago and it has compressed right now. So let me zoom in on that and I’ll show you the last year. So this is only showing one line. This is the tech Ford multiple, uh tech multiple minus the S&P multiple. And here it was, 35% premium a year ago.
01:31 Speaker A
That was pretty expensive versus only 10% today. And what’s really interesting to me is that remember off of those March 30 lows, we had that huge huge explosion uh rally especially in semiconductor stocks. Well, the multi the the gap between those multiples did not go up that much. and you can see they came down. Uh we did have a semiconductor bear market and now they’re up a little bit here, but only 10% premium. Now, I want to show you a much longer-term chart.
02:00 Speaker A
This is only the rate of change of that tech multiple. And this goes back to the end of the last century. So we have the .com boom and bust in there. And when this collapses rapidly, that tech multiple, that is tell that is like a reset for the market. Um a lot of times that is the best time to buy. So we saw this, the .com bust, that’s around 2001 and we saw kind of an echo of it in 2003. Then the global financial crisis hit. We saw that tech multiple crash and that was in 2008.
02:32 Speaker A
And guess what? We just saw it crash again, but critical distinction here, there was no bear market, there was no recession. So what’s going on? We had, uh, if you take a look at the underlying ratio, price divided by earnings, we had the price go up by about 40% in the tech in the tech market. So tech stocks went up 40%, but the earnings went up 80%. So that caused the multiple to shrink. And so that’s where we are right now and that’s where I got this headline.
03:02 Speaker A
The tech uh industry got a bear market reset without the bear market. And so, for all the people saying, well, AI is in a bubble and this can’t continue. There might be certain pockets of that, but the market has just gone through a giant reset without a recession, uh and without all the damage that a bear market causes. So, this gives me a a lot of optimism for the future here. This reset is something that future rallies are built on and since we didn’t have a market crash, that just means the bull market can probably go on to the upper right.
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