Tech's forward price-to-earnings ratio fell about 30% from a year earlier at its July low, a drop seen around the dot-com bust and financial crisis, while the S&P 500 hovered near a record high, demonstrating how stocks can rally and become cheaper without bear market destruction.
Earnings outrunning prices
- Tech prices rose roughly 40% over the past year while expected earnings jumped roughly 80%, meaning earnings outran prices and made stocks cheaper even as stock prices increased, a situation that contrasts sharply with typical bear market scenarios where price declines come through collapse rather than appreciation.
- In a typical bear market scenario, prices collapse, recessions knock down profit forecasts, and optimism gets beaten out of investors, forcing buyers to pay much less for the profits that survive but this time the decline in P/E came through price appreciation rather than collapse.
- For example, a stock trading at $100 expected to earn $5 (giving it a forward P/E of 20 times) that jumps 40% to $140 with expected earnings jumping 80% to $9 means investors pay only about $16 for every dollar of expected profit, making the stock cheaper despite its higher price.
Tech's record surge
- The Technology Select Sector SPDR Fund (XLK) had just ripped off its March 30 low, and measured by its 45-day rate of change — simply how much the price moved over the previous 45 trading days — it was the strongest surge in XLK's history going back to 1999 highlighting the unprecedented nature of the move and how quickly tech can rebound even amid broader economic uncertainty.
- For the PHLX Semiconductor Index (^SOX), only the March 2000 surge was stronger in data going back to 1994, putting the current rally in historical context against the dot-com era peak and showing how semiconductor-led advances can dominate market moves.
- Large-cap tech rallied over 50% in 45 trading days — its biggest surge ever going back to 1999 showing how concentrated tech strength can produce market-moving moves even as broader P/E dynamics shift and investors reassess risk across the sector.
AI spending boom at risk
- Big Tech spending enormous sums on chips, data centers, networking, and power, with investors already asking who gets paid from that AI spending boom and who gets stuck with the bill as the benefits and costs get distributed across the tech ecosystem and potentially to unexpected parties.
- If AI capacity gets overbuilt, customers slow their spending, chip pricing weakens, or the economy hits corporate tech budgets, analysts could start cutting those future profit forecasts which would reverse the cheapening effect and make stocks more expensive without any price movement.
- Story continues: the $140 stock earning an expected $9 costs about 16 times earnings but cut the forecast to $6 and the stock suddenly costs more than 23 times earnings without its price moving a penny illustrating how fragile the cheapening dynamic remains and how quickly sentiment can shift.
- Nothing happened to the stock. It just got a lot more expensive. Now the bull case comes down to one thing: The earnings have to show up as Jared Blikre global markets and data editor for Yahoo Finance noted in his analysis.
