Here’s why 2022 is not a repeat of the 2000 dot-com bubble

There are many comparisons in today’s market with that of the 2000-2002 dot-com bubble. As Ben Carlson puts it, speculative tech stocks crashed in both periods, Warren Buffett made a comeback and value stocks outperformed again.

• Are we there? The NASDAQ fell 80% from its peak in the dot-com bubble, but we’re only down 30% today.
• Maybe we already are… When we look at more speculative companies or funds like ARKK, which is down over 70% from its peaks.

Why is today different? In a series of tweets, Atreides Management Founder Gavin Baker, who lived through the dot-com bubble, gave reasons why today is nothing like then.

• If we were to revisit 2000, earnings per share of the 10 largest tech companies would have to fall another 73% — which Baker thinks “is not going to happen.”
• In 2000, many companies that went public had zero revenue and no business models.

Company earnings are much more resilient today, given a more considerable amount of a company’s revenue is subscription-based. Baker also argues that company valuations are low relative to their growth and profitability.

Downside risk: Fundamentals may be better today, but the economic conditions are worse due to high inflation and rising interest rates.

The market direction will be a tug of war between company fundamentals and economic conditions. So far, macroeconomic conditions are on top.

Zooming out: 2022 has been a bad year for stocks — but 2019-2021 were tremendous years, with the S&P 500 returning 29%, 16% and 27%, respectively.

• Looking back, these returns were unsustainable, and returns must balance out to achieve the S&P 500’s average returns of ~10.5% since inception.
• Morningstar said the market is a “healthy selloff,” and the chief strategist of Interactive Brokers sees an opportunity for those taking a longer-term view.