The writer is chief strategist at UBS Investment Bank The intellectual anchor for the equity rally that began after the US Federal Reserve ended its cycle of increases in January 1995 was provided by Alan Greenspan when the then chair of the central bank extolled improved productivity. The Fed is again close to a dovish pivot and, once more, forecasts of a productivity tipping point are driving equities higher — this time from the spread of artificial intelligence.
Unsurprisingly, comparisons to the 1990s rally are ubiquitous. If there is debate, it’s about where on that decade’s timeline we presently sit. Some make aggressive, bullish claims of being in the early stages of the rally, promising AI will reset earnings much higher. Others warn we’re deep in a bubble. The data doesn’t back either of these extreme views. The 1990s bull-run saw two phases: a steady climb from early 1995 to mid-1998, through which returns across sectors were balanced, followed by an explosive, narrow rally from late 1998 to early 2000. Today’s sectoral performance patterns, narrow market leadership and valuations resemble the second, bubble, phase.
Stocks considered defensive are lagging behind. Those more exposed to cyclical turns in the economy, particularly in the technology sector, are prodigious winners. The 10 largest stocks constitute 34 per cent of the S&P 500’s return over the past year, higher than at any point in the 1990s. At 34 times, the S&P 500’s cyclically adjusted, price-to-earnings ratio stands at the 96th percentile of the last century’s distribution, not far from 44 times, or the 99th percentile, in March 2000.