Investors in the tech industry have pointed to trouble ahead after some closely followed measures of tech valuations have revealed that they are, in fact, over-expensive. Including the cyclically adjusted price-earnings ratio, investors have compared the current stock market to the highs of the dot-com bubble in the early 2000’s.
However, according to Mr. Jim McCaughan, CEO of Principal Global Investors, these tech valuations are still justified and he heeded that the sector should be viewed through a single lens. With the US economy shifting from manufacturing and capital-intensive production to more intellectual development, Mr. McCaughan suggests that “this is why the Shiller CAPE doesn’t work anymore.”
“If you think about the cyclically adjusted price-earnings, the intellectual framework that was developed involved physical investment. When you’re on intellectual property- and that’s what creates value- some of the older concepts are kind of redundant.”
In today’s market, Apple, Alphabet, Microsoft, Amazon, Netflix, and Facebook lead the stock market, gaining 38% as a sector on the S&P 500 this year. In contrast to ten years ago, which saw Total, Citi, Microsoft, General Electric and ExxonMobil in the lead, modern companies have forgone what the companies of yesteryear highly valued: factories and capital equipment
“What they have is intellectual property – basically codes and ideas,” Mr. McCaughan revealed to Business Insider.
Robert Shiller, one of the individuals who helped develop the CAPE ratio, has warned investors against using the valuation measure in order to time investments.