Investment Viewpoint: Partying like it’s 1999? Contextualizing the IT surge

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Markets and macro insights with Bernard Swords, Chief Investment Officer and Sebastian Orsi CFA, Senior Research Analyst

What are the key developments in the Information Technology sector today?

• Entirely new categories of products and services have emerged, driven by advances in Artificial Intelligence.
• Companies have significantly increased their capital investment in the infrastructure needed to power and further enhance these new tools: data centres, networking equipment and software platforms.
• The largest companies providing cloud computing services capable of rapid expansion without detriment to performance have seen growth estimated at approximately 50% in 2025 and already forecast at 20% for next year.

How should we contextualize these developments?

• Investment has indeed increased but has not reached levels that indicate a speculative bubble.
• The proportion of US investment in software and information processing equipment is not unprecedented, it’s currently running at 4-4.5% of GDP.
• The claim that data centre and related investment drove almost all of US GDP growth in the first half of this year is a bit misleading; direct investment in software and information processing equipment accounted for approximately 40% of GDP growth, but the figures seem distorted by a surge in net imports (which reduced GDP).
• The strikingly high estimates of future growth (for instance, an approximate 40% p.a. growth in data centre investment through 2030) may or may not be realised, but also don’t seem discounted in public market valuations.

How have equity markets responded to the IT investment drive?

• The IT sector (and in particular the tech giants referred to as the ‘Magnificent Seven’) has been a major driver of overall index performance.

Is the surge a bubble?

• Against the concern that the surge represents a bubble, we note that the major IT companies’ earnings growth has been the main driver of absolute and relative share price performance.
• For the ‘Magnificent 7’ excluding Tesla (we exclude it here, due to its distortive earnings and valuation volatility), valuation multiples have been relatively stable since prior to the COVID pandemic.
• The publicly listed IT sector valuations also remain well below the extremes seen during the dot-com era.

How do we contextualize the IT surge?

• At the peak of the 1990s tech bubble, the S&P 500 IT sector showed a price-to-earnings multiple of 70 times trailing earnings and 50 times that of future earnings forecasts. This followed an eight-year period in which the sector’s earnings had grown more than tenfold.
• Today, we are in only the third year of what could be a long innovation cycle, and the sector is trading on approximately 35 times its 2025 earnings expectations (the ‘Mag-6’ is on approximately 32x).
• The comparison with 1999 shows a significantly lower disproportion between earnings and valuations, suggesting that we may still be in the early stages of a potentially long and rewarding journey.

What further factors speak against fears of a bubble?

• Whereas in 1999, many firms relied heavily on debt, today’s tech leaders are so far mainly using internally generated cash flows to finance investment, and consequently represent lower risk to financial systems and institutions. Financial leverage is likely to increase over time, a development that should be monitored.
• Earnings growth has been strong this year, and forecasts have continued to rise as the year has progressed, which is a indicator of a healthy market.
• In bubble scenarios, we typically see prices rising while earnings expectations fall. This suggests a disconnect between fundamentals and investor enthusiasm. The scenario today is rather different. We are seeing strong profit performance drive share price performance, especially among the mega-cap tech names.

What are our overall conclusions?

• The increased capital spending in the IT sector is boosting the economy and does not comprise an excessive proportion of GDP at this stage.
• The IT sector has had a strong run recently, and while valuations may be slightly ahead of earnings trends, they are not excessively stretched. Compared to the IT bubble in 1999, valuations are considerably lower, the companies have little or no financial gearing, and profit forecasts are continuing to rise.
• The innovation cycle is still young, and history tells us that the companies leading this kind of transformation tend to maintain their leadership and grow their market share over time. That’s why we maintain confidence in high exposure to the US IT sector.