Do you have data on how the equal weight set of N100 stocks performed during the tech crash 2000-2002?
Badly!
Both in terms of earnings, and even more in terms of stock returns.
That’s why they called it the tech crash : )
The real total return series for the Nasdaq 100 equal weight peaked 2000-03-27.
The subsequent low was 2002-10-07, real total return loss -81.1%.
There wasn’t a fresh all-time-high real total return level until 2014-11-24.
That tech bubble was a doozy.
But note, that’s mainly because the prices were so extraordinarily high at the top, not because there was no hope of earnings or value.
The median trailing earnings yield was under 1% for quite a while, and bottomed at 0.565%.
Compare that to the median Nas100 earnings yield value at yesterday’s close of 3.154%.
The Nasdaq companies are relatively pricey lately, but a lot cheaper than they were in the tech bubble.
Of course, earnings are cyclical. A better measure would be the trend earnings yield.
Smooth out the earnings squiggles, then relate the on-trend real earnings to the then-current price.
On that metric, the most expensive day during the tech bubble was a median trend earnings yield of 1.3%.
And recent figures have represented a trend earnings yield of around 3.2%. (last month–sorry I don’t have today’s figure)
So, for the Nasdaq 100 firms on that metric, the tech bubble peak was 2.4 times as expensive as it has been recently.
But the interesting thing is that, after the horrible tech wipe-out, the earnings came (nearly) all the way back to the prior trend.
Imagine you were a super-bullish 1990s optimist, and simply took the real earnings level from (say) Q3 1997 through early 2000, and extrapolated it 22 years into the future.
How far off would you have been by now?
A lot…but not nearly as much as you’d think.
The pre-crash tech bubble trend would have led you to believe earnings today would have been 43% higher today than they actually are.
Sounds like a big error, but a forecast based on a short bubble stretch that’s off by only 1.69%/year 22 years later isn’t really that bad.
The possible moral is that the earnings of this crowd, other than transient dips during bears, trend pretty reliably. (And rise quickly)
The prices paid for those firms swing wildly, but their earning ability very much less so.
This gives hope for a strategy: keep an eye on the trend earnings, and the trend earnings yield.
Figure out the likely forward earnings based on the assumption that earnings will rise on trend at a rate comparable to history.
And make the guess that the valuation multiple on those trend earnings will be “typical” in a few years.
Jim