taking a stretch - where we are with us equities

Parallels are drawn between the mid-1990s tech revolution and today's AI-driven surge in the US equity market. While valuations appear stretched, the underlying conditions are more measured than the dot com era. The US economy continues to show resilience with AI-led productivity gains and potential rate cuts shaping the outlook.

Reflecting on US Equities

by Hoshang Daroga CFA, Investment Director, Elston Consulting
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Looking at the current state of the US equity market, we find ourselves in a moment that feels eerily reminiscent of the mid 1990s, but not 1999 – at least not yet. Valuations are stretched, optimism is high, and the transformative promise of a technological revolution - this time driven by AI - echoes the exuberance of the dot-com era. But while the parallels are striking, the underlying dynamics today are more nuanced, and the outlook demands further consideration.

We begin by acknowledging that valuations, depending on how we measure them, tell different stories. On a backward-looking basis – price to trailing earnings – markets appear expensive. But when we shift to forward-looking metrics, based on expected earnings, there is the risk that earnings could be under-estimated if the extent of productivity gains come through.   This divergence is central to our current dilemma: are valuations attractive, full, stretched, frothy, or in bubble territory.  We believe we are in the stretched phase.

The comparison to 1998 is helpful. Back then, markets had already rallied on the back of the internet revolution, and the Federal Reserve’s aggressive rate cuts following the LTCM blow up and Russia debt default crisis helped fuel further gains. Today, we see some similar overlaps: a weakening US economy, rate cuts being priced in, and the potential for a new Fed chair who may act more decisively. If history rhymes, there are the ingredients for another melt-up in equities.

However, we must tread carefully. The opportunity cost of sitting on the sidelines is high. Many managers who called the top too early in the 1990s missed out on substantial gains – S&P 500 rallied over 50%, and the NASDAQ surged by more than 200% before the eventual crash. Calling the top too early and for too long can be costly, both financially and reputationally – for advisers and managers alike.  But being overexposed at the peak carries its own substantial risks. The key from lessons past is to diversify with lower valuation exposures, to be have some firepower in reserve and to only be exposed to highly liquid markets.
The challenge lies in identifying where we are on the spectrum: stretched, frothy, or in a bubble.

We believe we are in the “stretched” zone. Frothiness and bubble-like conditions are not yet evident. The key drivers of future momentum will be earnings growth and interest rate policy. If earnings continue to surprise to the upside and rates fall, valuations could be sustained—or even expand further.
Regionally, the US remains the standout. Compared to the UK and Europe, where recession risks loom and earnings growth is tepid, the US economy shows resilience. Forecasts suggest US corporate earnings could grow 10–12% annually over the next two years, reinforcing our conviction in US equities.

Sector-wise, AI remains the focal point. Companies like NVIDIA, despite high price-to-sales ratios, boast exceptional profit margins – over 60% – far surpassing their dot-com era counterparts. If these margins hold and productivity gains from AI materialise, current valuations may prove justified. However, widespread adoption remains a critical variable. Without it, there is a risk that those extended valuations start to compress.

In summary, we are navigating a US equity market (the main driver of global equity markets) that is stretched but not yet frothy, and not in bubble territory The path forward hinges on earnings delivery, rate policy, and the realisation of AI’s productivity promise. .  But we need to remain alert.