On July 20, the S&P 500 Information Technology Index closed at a record high of 992.29, surpassing its previous peak of 992.29. The result follows a consistent period of growth for the index – which measures the market capitalisation of more than 60 of the US’ largest tech companies – indicating the current swell of investor interest in tech shares is unlikely to break.
The market hit its previous record in March 2000, at the pinnacle of the dotcom bubble. But, just two years later, a dramatic downturn caused the market value of tech companies to tumble by a staggering $5trn, wiping out some established tech players such as Pets.com and Webvan, while taking huge chunks off the value of others, like Cisco.
The mushrooming growth of internet users following the advent of the World Wide Web in 1993 sparked a boom in the number of tech companies, with money flooding into Silicon Valley as giddy investors hoped to cash in on the digital future. However, with a large number of investors having little to no expertise in the area, many funnelled money into companies with no potential profitability, leading to hugely inflated valuations.
Today, social media firms generate a concrete source of revenue from advertising and personal data collection
The landscape of the technology sector is now very different; while some early companies like eBay and Amazon did survive the dotcom bubble, most of the social media companies that define internet usage today were born in the aftermath. These companies have crafted a very different business structure to the early internet model.
Dotcom bubble companies traditionally offered free services in the hope of growing large user bases before introducing a charge. Today’s social media firms, however, still offer a free service, but generate a concrete source of revenue from advertising and personal data collection. While some companies riding the wave of investor speculation are still likely overvalued, there is an underlying potential for profit.
Speaking to Reuters, Phil Blancato, Head of Ladenburg Thalmann Asset Management, expressed confidence this period of mounting investor interest was not endemic of a second internet company crash: “There is some euphoria around tech, but there are also real earnings.”