Is the Stock Market’s Bifurcated Performance Justified?

Nobody knows whether the current magnificent stock market run is simply an emotionally driven bubble waiting to bust, or if this cycle is “fundamentally” different from past perceived market bubbles

As every investor knows, technology stocks have had a run for the ages. For some time, the entire U.S. stock market has been dominated by the S&P 500 Index due to the outsized results of a small number of mega-cap, new-era darlings! The magnitude and persistence by which the contemporary stock market has been overwhelmingly bifurcated by a small cadre of winners has been both amazing and alarming.

Chart 1 shows the relative total return of the S&P 500 technology sector since 1990. The dotcom cycle in the latter half of the 1990s was equally eye-catching in terms of outperformance but was not nearly as “chronic”. As shown, the dotcom run lasted only about 6 years (from 1995 to 2000) whereas the contemporary “magnificent cycle” began in mid-2013 and is just now finishing its 12^th year! By comparison, the dotcom cycle appears much more like a financial market bubble where investors briefly became emotionally fascinated by anything “.com” causing the stock market to blow hot and eventually implode. Although the magnificent cycle is equally impressive on a performance basis, its success has been dragged out over more than a decade and it appears much more methodically driven than emotional.

Consider the persistence of the magnificent run. Since 2013, the S&P 500 technology sector has outpaced the overall S&P 500 total return in 10 of the last 11 calendar years. For over a decade, only during 2022 did tech stocks “underperform” the overall market. During the last 11 years, on a price basis, the technology sector outpaced the second-best performing sector (consumer discretionary) by 2.8 times and bested the overall S&P 500 index by 3.2 times! In the last 11 calendar years, against all 11 sectors comprising the S&P 500 index, the technology sector has delivered the best performance 4 times, the second best 1 time, the third best 2 times, the fourth best 2 times, and has only come in lower than fourth best 2 times.

Is the contemporary stock market bifurcation, like the dotcom cycle, simply an emotional investor bubble waiting to implode? Possibly. But, unlike the dotcom era, are there any sustainable fundamental forces underlying the magnificent cycle? Sure, creativity and innovation are at the heart of both the dotcom and the magnificent cycles. But innovation cycles run hot and cold. Is there anything which is more sustainable and commonplace among today’s new-era companies which explains and perhaps even justifies why the contemporary stock market’s performance profile has been so persistently bifurcated?