Our view: Given the popularity of companies across the US Information Technology (IT) sector (within the S&P 1500 index) with clients, we have fielded many questions, especially as these stocks have sold off quite aggressively from their respective peaks. Many investors (both institutional and retail) have referred to the striking similarities of the current sell-off across US IT stocks and that of the 2000s Dot-Com Bubble (Dot-Com Bubble). In the subsequent pages, we delve into the similarities, differences, and opportunities between the Dot-Com Bubble and the most recent IT bubble, which we refer to as Dot-Com 2 0 (we believe it began in 2020) We share insights on our expectations moving forward for the group, given how things transpired during the Dot Com Bubble and what fundamentals and macro indicators are suggesting today.

• Similarities are many across both time frames. During the Dot-Com Bubble, the US economy remained robust and was growing above-trend during the boom years, which was also the case during Dot-Com 2.0, but economic growth slowed materially and eventually contracted ahead of and during the 2001 recession. Higher yields/rates began to move higher as early as 1998 and were largely responsible for the slowdown, but given the lack of precision of rate hikes/monetary policy changes and the lag effect of these decisions on the real economy, investors only began seeing the slowdown in macro/corporate fundamentals in early 2000. Consumer sentiment was also strong during the boom years, as was the case during Dot-Com 2.0, while employment levels fell to cycle lows. But both measures quickly reversed course as higher rates/yields began to weigh on the real economy. We are already seeing signs of the impacts of tighter policy on the real economy. As for the IT sector as a whole, as yields began to rise, valuation multiples compressed, which we note was the first leg down for the group during the Dot-Com Bubble. And as the economy began to slow and eventually contract, corporate earnings fell sharply, resulting in the second leg lower for the sector. The S&P 400 Mid-Cap IT index fared the best from peak-to-trough, followed by small and large-cap IT stocks.
• Notable differences a tale of two time frames. Corporate fundamentals for the US IT sector as a whole, namely profitability and margins, remain the major differences between the two periods i.e., they are much higher now than in the early 2000 s Moreover, peak valuations during the Dot-Com Bubble were more extreme than at the start of the Dot-Com 2.0 sell-off on both NTM P/Es and also on EV/EBITDA multiples. We expect the combination of lower extreme valuations and higher profitability to prevent a repeat of a 2000 s peak to trough sell off (which totaled 80 for the IT sector moving forward. However, we note that the rapid move in rates/yields during Dot-Com 2.0 has resulted in a much steeper sell off than what was observed during the Dot- Com Bubble.
• Pockets of opportunity, while downside risks remain. We see the greatest risk/reward across the S&P 400 Mid Cap IT index from both an earnings and relative value perspective with the S&P 500 Large-Cap IT group as the least attractive. However, that said, we advise investors to remain very selective (i.e., leverage the accompanying screens provided with this report) to seek out companies across market capitalizations that are high-quality, led by strong management teams, trade at attractive valuations, and offer durable forward earnings that provide a reasonable buffer to help cushion the blow from the many uncertainties that may lay ahead. In a nutshell, we expect the selling pressure/weakness to continue for the IT group as a whole, especially if rates/yields continue to move higher, cost pressures/inflation stays elevated, and the economy heads into a hard landing/recession (this appears to be the most likely scenario). That said, opportunities are many for the long term oriented investor.

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