Are the ‘Power Five’ stocks creating another bubble?

Comparisons to the 1990s tech bubble can be misleading

Are the ‘Power Five’ stocks creating another bubble?

Technology has been the best-performing sector of the S&P 500 Index in 2017. As such, some investors are drawing comparisons between today’s technology bull market and the infamous dot-com bubble of the late 1990s, which reached its peak in March 2000.1 Both then and now, technology stocks were catalysts behind major market rallies.

But that’s where the similarities end, in my view. While technology has delivered the best sector performance within the S&P 500 Index over the past three years (July 29, 2014, through June 29, 2017), we are still nowhere near the bubble status of 17 years ago.1

As evidence, consider the five largest publicly traded stocks in the United States: Apple, Alphabet (the parent company of Google), Microsoft, Amazon and Facebook. These are referred to by various acronyms, such as FAANG or FAAMG, but for our purposes we will collectively call this group of technology titans the “Power Five.”

That was then, this is now

Like in the late 1990s, technology and technology-related companies dominate the market today; the stocks above hold the top five positions within the S&P 500 Index by market capitalization. However, I believe there are three significant differences between the dot-com bubble and today:

  • Valuations
  • Cash and marketable securities
  • Trailing returns

Let’s explore each of these differences:


As you can see from the tables below, today’s “Power Five” trade at an aggregate of 30 times trailing earnings. That compares with an aggregate of 78 times trailing earnings for the five largest tech stocks in March 2000. This difference equates to total valuations for the five largest technology firms that are 60% lower than they were 17 years ago. If each of these companies saw their stock prices double (and we’re not suggesting they will), their market capitalization-to-net income multiple would rise to 60x, which would still be less than the five largest technology stocks at the height of the tech bubble.

“Power Five” (June 19, 2017)
Company Market cap (millions) Market cap/ net income Gross margin Free cash flow yield Cash + marketable securities/ market cap 1 year return 3 year return
Apple  $   762,993 16.7x 38.4% 24.2% 33.7% 59.7% 64.7%
Alphabet  $   667,993 34.3x 60.7% 29.2% 13.8% 42.3% 64.4%
Microsoft  $   547,153 30.7x 61.3% 32.6% 23.0% 45.7% 83.3%
Amazon  $   475,667 184.2x 35.6% 6.7% 4.5% 42.4% 194.9%
Facebook  $   443,080 40.1x 86.4% 40.1% 7.3% 36.4% 130.6%
Group  $ 2,896,886 30.0x 47.4% 22.8% 18.3% 45.3% 107.6%


Tech bubble (March 24, 2000)
Company Market cap (millions) Market cap/ net income Gross margin Free cash flow yield Cash + marketable securities/ market cap 1 year return 3 year return
Microsoft  $   560,671 72.0x 85.7% 63.6% 3.1% 20.1% 355.9%
Cisco  $   546,894 270.3x 65.0% 30.6% 0.4% 188.8% 1221.4%
Intel  $   463,634 63.4x 59.7% 29.7% 4.1% 129.1% 292.8%
Oracle  $   245,473 190.3x 65.3% 16.5% 1.0% 547.4% 920.2%
IBM  $   215,221 27.9x 36.5% 4.7% 2.7% 35.7% 269.4%
Group  $ 2,031,894 77.8x 50.8% 19.4% 2.3% 184.2% 611.9%

Source: Bloomberg L.P., S&P Dow Jones Indices. Gross margins represent total gross profit divided by total sales. Free cash flow yield represents total free cash flow divided by total sales. Past performance is not a guarantee of future results.

This difference in valuations is even more substantial when earnings yield (the reciprocal of an earnings multiple) is considered relative to the interest rates of each period. Today’s aggregate 3.3% earnings yield for the “Power Five” compares with a roughly 2.2% yield for the 10-year Treasury bond – a risk premium of 1.1%. During the peak of the tech bubble, the aggregate earnings yield was 1.3% for the five largest technology stocks – 5.1% lower than the 10-year Treasury bond’s yield of 6.2%. In other words, during the dot-com bubble, investors were not being compensated for the risk of holding technology stocks in the form of a risk premium. Now they are.

Cash and marketable securities

Another big difference between the tech bubble and today centers on liquid assets. Cash and marketable securities (most held abroad) make up 18.3% of the “Power Five’s” aggregate market capitalization, compared with 2.3% for the largest companies during the tech bubble. To be fair, much of today’s high cash percentage is being driven by two companies – Apple and Microsoft. But even Amazon’s current cash holdings – the lowest of the “Power Five” at 4.5% of market capitalization – are higher than the highest cash holdings of the five largest firms during the height of the dot-com bubble (Intel at 4.1%).

Trailing returns

Today’s technology stock returns may be strong, but they’re nowhere near the lofty levels of the tech bubble. Through June 19, 2017, the average trailing one-year return for the “Power Five” was an enviable 45.3%, while the cumulative three-year trailing return averaged 107.6%. While impressive, those returns still lag the average performance of the five largest stocks during the tech bubble: 184.2% over the trailing 12 months and a whopping 611.9% over the trailing three years.

Gross margins are one of the areas in which the five largest companies of the tech bubble beat the “Power Five.” But even here the advantage is slight – 50.8% versus 47.4%. When you consider how much cash is being generated from those profits, the “Power Five” once again beat the largest companies of the tech bubble, with a free cash flow yield of 22.8%, versus 19.4%, respectively.

Too few stocks accounting for too much return?

Through the first half of 2017, the “Power Five” have helped supercharge market returns. As such, it’s common to hear concerns about how much impact just a few giant companies are having on the market. But because those same stocks have the largest weights in the S&P 500 Index, it should not be a revelation that larger stocks have a greater impact on a market-cap based index. That’s just math at work.

And this isn’t a new phenomenon. In fact, during the 20 calendar years between 1997 and 2016, the five largest stocks within the S&P 500 Index accounted for an average of 20.4% of the index’s total return. Through June 19, 2017, the “Power Five” have contributed just over a quarter of the S&P 500’s 10.6% total return – slightly higher than the long-term average. That represents a 0.26 standard deviation from historical norms, which, in the world of stocks, is really not that much.

Investors seeking access to some of the largest companies in technology today may wish to consider Invesco QQQ, an exchanged-traded fund that tracks the Nasdaq-100 Index.

1 Source: Bloomberg L.P., June 19, 2017

All data sourced from Bloomberg L.P., S&P Dow Jones Indices and FactSet Research Systems Inc. as of June 26, 2017.

Important information

Blog header image: Isachic/

The Nasdaq-100 Index includes 100 of the largest domestic and international non-financial securities listed on the NASDAQ Stock Market based on market capitalization.

The S&P 500® Index is an unmanaged index considered representative of the US stock market.

Earning yields shows the percentage of each dollar invested in a stock that was earned by the company.

A risk premium is the amount of return an asset generates above cash.

Standard deviation measures a portfolio’s range of total returns and identifies the spread of a portfolio’s short-term fluctuations.

Valuation is how the market measures the worth of a company or investment.

Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa.

QQQ’s allocations as of June 26, 2017 — Apple: 11.56%, Microsoft: 8.16%, Amazon: 7.20%, Facebook: 5.51­­%, Alphabet Class C: 4.92%, Alphabet Class A: 4.31%, Cisco: 2.42%, Intel: 2.44%. QQQ has no allocation to IBM and Oracle. Holdings mentioned are for informational purposes only and are not buy or sell recommendations.

An investment cannot be made into an index. There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. The Fund’s return may not match the return of the Underlying Index. The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the Fund. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

Although bonds generally present less short-term risk and volatility than stocks, the bond market is volatile and investing in bonds involves interest rate risk; as interest rates rise, bond prices usually fall, and vice versa. Bonds also entail issuer and counterparty credit risk, and the risk of default. Additionally, bonds generally involve greater inflation risk than stocks.

John Q. Frank, CFA
QQQ Equity Product Strategist

John Frank is the QQQ Equity Product Strategist representing Invesco exchange-traded funds (ETFs). In this role, Mr. Frank works on researching, developing product-specific strategies and creating thought leadership to position and promote the Invesco QQQ.

Prior to joining Invesco, Mr. Frank was an Assistant Portfolio Manager at RS Core Capital, a multi-asset class investment firm. In this role, his primary responsibilities included research, risk management and asset allocation with a focus on the equity and hedge portfolios. Before RS Core Capital, he spent six years at J.P. Morgan Asset Management advising institutional investors on asset/liability management, asset allocation and pension regulation and worked across the defined benefit, defined contribution, endowment and foundation segments. He began his career at General Electric in a leadership development program where he was placed within the GE Energy division.

Mr. Frank earned a BSE degree in industrial & operations engineering from the University of Michigan – Ann Arbor and an MBA with Honors from the University of Chicago Booth School of Business with concentrations in analytic finance, econometrics, and statistics. He is a CFA charterholder and a member of the CFA Society of Chicago as well as the Beta Gamma Sigma Society.