Hi All — Brian here. Stop me if you’ve heard this one before, but tech continued its dominance in July, as the Nasdaq handily outpaced the S&P 500 and left the DJIA in the dust.

Massive bets in the AI sector are still paying off, with big earnings beats from Meta Platforms and Microsoft as they keep pouring resources into the industry.

With stocks surging, it's tempting to think tech can do no wrong. We’ve covered tech’s resilience in prior monthly updates. But at a time when Meta paid $250 million to lure a 24-year-old prodigy AI programmer, and Alphabet increased its AI spending plans to $85 billion for this year, are we looking at a truly paradigm-shifting technology? Or, for the third time this century, unsustainable hype?

It is impossible to predict the future, but history gives us some reasons to dig deeper. There are noteworthy parallels with the run-up to the dotcom bubble. Cracks are starting to show in the labor market, a handful of tech stocks are leading the rally, and the number of AI mentions in earnings reports is soaring.

So, is the white-hot tech sector due for a correction? Or are things different this time, with stronger fundamentals and a different climate? And how might investors prepare? Here’s what you need to know.

JULY MARKET PERFORMANCE

JULY MARKET SUMMARY

• The Nasdaq Composite gained 3.7% in July, extending its winning streak to four months, while the S&P 500 rose 2.2%. The Dow Jones eked out a 0.1% gain for the month.

• Tech’s ongoing outperformance continued as Microsoft and Meta delivered triumphant earnings reports. Microsoft grew its revenue by 18% year-on-year, the fastest increase in over three years. Meta's top line was up 22% from the year before as investments in AI continue to pay off.

• On July 30, the Federal Reserve announced its decision to keep interest rates in the 4.25%-4.5% range, as was widely expected. However, two Federal Open Market Committee members voted to cut rates by 25 basis points, a level of dissent the Committee hasn’t seen since 1993.

• The ADP National Employment report, released July 30, showed the private sector added 104,000 jobs in July, with annual wages rising 4.4% year-over-year.

• The Consumer Confidence Index rose by 2 points to 97.2 in July, as expectations for incomes, business conditions, and the labor market stabilized somewhat. For context, the Consumer Confidence Index stood at 100.3 a year ago.

• The consumer price index ticked up to 2.7% in June, up from 2.4% in May. Core inflation, which excludes food and energy, came in at 2.9%, up from 2.8% in May.

ONE BIG THING: VALUATIONS CHECK

Last month saw six back-to-back record closes for the S&P 500. Certain tech giants jumped more than 10% in a day following well-received earnings reports. Kohl’s nearly doubled in intraday trading, albeit briefly, making it the latest "meme stock" to soar following a social media frenzy. And Microsoft and Nvidia have become the world’s first $4 trillion companies.

All those milestones make it as good a time as any to take stock of valuations and ask whether they’re approaching perilous levels. It calls to mind the cautionary tale of Cisco Systems in the late 1990s and early 2000s.

In March 2000, Cisco briefly surpassed Microsoft as the world’s most valuable company, thanks to its dominance in the router market that formed the backbone of the Internet revolution. But, despite being a solid company with in-demand products, Cisco’s market value collapsed, and has yet to return to those peaks.

There are certainly similarities between today's market exuberance and the dotcom boom. However, there are also some important differences.

As investors grapple with the question of whether potential profits from AI justify the high stock prices, price-to-earnings ratios are a useful indicator. Back then, Cisco's P/E ratio was over 196. Today, Nvidia’s P/E ratio is almost 60 while Microsoft's is 39.

These are high, but they still show that earnings underpin investors' hopes for tech giants today, more so than in 2000. Given that these two companies make up around 15% of the S&P 500 by weight, they can have a disproportionate impact on the broader market. However, neither appears to be near the “nosebleed valuation” levels that catalyzed the 2000-2001 tech collapse.

Zooming out, the average P/E ratio of the Nasdaq 100 is 33. That’s far below the average of 200 that Nasdaq-listed stocks reached during the peak of the dotcom era.

It isn't surprising that the broadening adoption of AI echoes the birth of the internet in some ways. These are transformative technologies, and investors, understandably, want to profit from the huge potential changes. Consequently, hype runs rampant, and the dominance of a small number of high-performing stocks is eyebrow-raising.

But, for now at least, company fundamentals seem to support their growth potential. Almost three years into the current bull market, we will continue to watch those numbers carefully.

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CLOSING REMARKS

Our team at Griffin Asset Management is here to help you make the most of the opportunities and challenges ahead.

If you have any questions or would like to discuss your financial strategy, please don’t hesitate to reach out.

We’re always available to set up a call and provide the personalized advice you need. Thank you for your continued trust and partnership.