This Time is Different... Or Not?

Abstract

This thesis examines whether the current valuation levels in the technology sector exhibit bubble-like characteristics, drawing parallels to the dot-com bubble era. To address this, we have conducted a threefold analysis. First, we track the NASDAQ Composite Index over time, benchmarking its performance and valuation metrics against other major indices. Second, we employ a value relevance model to investigate the alignment between market valuations and fundamental accounting metrics within a high-tech sample. Third, we simulate investment strategies to evaluate the risk-return profile of high-tech portfolios compared to more traditional sectors. Our findings indicate a current detachment between valuations of technology stocks and their fundamental accounting measures. This trend resembles a pattern observed during the dot-com bubble and the U.S housing bubble of 2008, where speculative dynamics outcompeted traditional valuation metrics. The value relevance model revealed a decline in the explanatory power of accounting fundamentals, particularly in recent years, suggesting an increased reliance on other factors.The analysis of the Nasdaq Composite Index further highlights the rapid growth in technology stocks compared to other major indices. Meanwhile, the investor simulation reveals that momentum investors in high-tech companies have enjoyed superior returns in recent years but also signals the likelihood of an impending reversion. Our findings imply that investor behavior in recent years may have shifted toward more speculative and potentially irrational strategies, as we see similarities to the dot-com bubble era. The growing detachment from accounting fundamentals suggests a need for caution, as speculative dynamics could increase market volatility and risk. While the current environment does not definitively signal a bubble, the parallel to historical bubbles suggests a heated technology sector, which arguably should entail careful monitoring to assess the sustainability of company valuations in the technology industry