Dow 5,000 Rang in ’90s Boom. What About S&P 5,000?

Everyone knows you’re not supposed to bet on a bubble, but what about a potential bubble?

As the S&P 500 Index climbed above 5,000 on Friday, many of us found ourselves wondering what exactly we should call this market: a bubble or a durable new bull? Are we reliving 1995 — when, coincidentally, a previous “soft landing” economy pushed the Dow Jones Industrial Average above 5,000 en route to a 25% annualized return over the rest of the decade — or 1999, when the by-then-flimsy stock market edifice was on the verge of collapse? As is too often the case, it’s hard to know.

The 1990s parallels, of course, seem to pop up everywhere. Just as internet stocks were booming then, the 2023-24 market has been marked by breathless enthusiasm for the potential of artificial intelligence as well as wildly disparate guesses about how the technology will translate into future cash flows. Now, as then, market concentration is high and rising, and one stock encapsulates all of the market’s secular growth dreams and bubble nightmares (today: Nvidia Corp.; then: Cisco Systems Inc.).

Here’s how Newedge Wealth LLC senior portfolio manager Ben Emons framed the 1990s analogy in a note on Wednesday:

The market flocked in 1995 to hot tech stocks like Cisco which is often compared to [Nvidia, or NVDA]. The company was admired for its software and hardware that allow far-flung, otherwise incompatible computer networks to talk with each other and to connect to the Internet.

Cisco skyrocketed and kept burning, and that carried the Dow Jones higher by breaking out of its trading channel once the 5000 level was breached... But if NVDA is like Cisco 1995, then its 41% gain YTD means that we’re just getting started. Cisco clocked over 100% in 1995, after clocking over 100% annualized returns since its IPO in 1987. NVDA is in the exact same momentum stage. Dow 5000 heralded the soft-landing economy where it was about one superstar tech stock contributing significantly to concentration in the indices.