The Tech Bubble: Some Lessons for Rational Investors

Abstract

The second half of the 1990s proved to be remarkable, following a lackluster start to the decade, for both the US economy and the stock market. The catalyst was a revival in productivity growth that accompanied advances in computer technology and more widespread application of the internet. Commentators in the media heralded it as the beginning of a new era in which the “old economy” founded on manufacturing would be displaced by a new tech-oriented economy. The US stock market initially surged on the back of strong corporate profits. However, by the end of the decade the market’s advance far outpaced earnings growth, and valuations as measured by price to earnings multiples climbed to record levels for tech stocks.