you call this a bubble?

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With the Nasdaq hitting 5000 last week and all the talk about whether we’re in a new dotcom bubble or not, it’s been easy to overlook something: most stocks are having a ho-hum 2015, at best. After Friday’s steep selloff, the Dow is virtually flat since January 1st and the S&P 500 is up a grand total of 13 points, or .6 percent, over that same period. The Russell 2000 has fared slightly better. It’s gained about one percent. That’s not bad. But it’s not exactly the stuff that bubbles are made of.

So, is the bull market stampede finally starting to slow? I’m always hesitant to make predictions. For all I know (or anyone else), the markets could rally again this week and shoot up double digits yet again by year’s end. But I will say that the same negative effects that have dampened stocks so far in 2015 will almost certainly get worse in the coming months.

First, after an underwhelming final quarter in 2014, corporate earnings in the first quarter of 2015 are not going to be pretty. Energy firms make up roughly ten percent of the S&P 500, and just about none of them are going to show positive year-over-year earnings growth. As a result, most analysts are expecting corporate earnings for the entire S&P to shrink in 1Q and perhaps 2Q, as well. Oil’s decline has leveled off recently, but a number of smaller exploration and oil services companies could easily go to zero in the near future and big honchos in the space like Exxon are hunkering down for a prolonged period of low to moderate prices. That’s good for American consumers and America’s economy as a whole, but not so good for stocks.

Second, it’s looking more and more likely that Yellen and Co. will finally find the backbone to raise interest rates sooner than later. A boost could come as early as June. It’s definitely the right thing to do, but it’s probably going to weigh on stocks, too. Since the Fed slashed rates to nothing in 2008, equities have been the only game in town for institutional investors looking to earn decent returns. That’s going to change when rates creep higher. Big players will almost certainly divert capital into other opportunities. And if energy stocks and corporate earnings continue to flag, stock markets could see a more serious outflow.

Even amid a rate hike and negative corporate earnings, the Nasdaq could easily continue to outperform the other indices. As others have pointed out, there is simply no comparison between the tech sector of today and the dotcom mania of the late 1990s. Back then, companies like Commerce One had virtually no revenues (let alone profits) and still soared to billion dollar market caps. These days, you could almost (emphasis on almost) argue that the Nasdaq is undervalued, with leading players like Google, Microsoft, and Apple trading at shockingly modest multiples. However, in a higher interest rate environment, a lot less liquidity will be sloshing through the markets, including the Nasdaq. That means profit-challenged, momentum-driven stocks (Twitter, anyone?) could have a much tougher time making new highs.

One thought on “you call this a bubble?

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