Stocks Would Need to Rise Another 20% to Look Like ’90s Bubble

If a bubble is forming in U.S. stocks, it has plenty of room to expand before it bursts, according to strategists at Societe Generale SA.

A team at the bank led by Manish Kabra said the S&P 500 Index can climb to 6,250—roughly 20 percent higher than its current level—before reaching the multiples seen at the peak of the dot-com boom in 2000. That suggests the stock market can continue its sharp advance despite brewing worries that it has run up too far.

“We think the current rally has been driven more by rational optimism than irrational exuberance,” Kabra, SocGen’s head of U.S. equity strategy, said in a note to clients. He cited the “better-than-perceived” earnings breadth, new profit-cycle highs, and an upturn in global economic indicators. “We expect these drivers to maintain their momentum.”

His optimism comes after U.S. equities posted gains in all but three weeks this year on a renewed appetite for technology shares amid enthusiasm around artificial intelligence, continued economic strength, and expectations that the Federal Reserve will start easing policy. Sentiment has been so upbeat that it’s drawn comparisons across Wall Street to prior market bubbles like the tech boom of the late 1990s, spurring a debate over whether valuations are too high.

Firms including Bank of America Corp. and Goldman Sachs Group Inc. are among those that have aimed to dispel parallels to the dot-com era, while JPMorgan Chase & Co. has sounded the alarm about the market’s potential froth.

“Turning point signals say run with the bulls,” Kabra wrote in his note. “The S&P 500 has clear room to overshoot,” he added, “as the new highs on the index coincide with new highs in the profit cycle.”

During the internet boom at the turn of the century, the technology sector traded at two times its profit share in the S&P 500 and 25 times its forward price–to–earnings ratio. Applying the same math would place the gauge at 6,250 to “tip over into irrational exuberance from current rational optimism,” according to Kabra.

The strategist said the Nasdaq 100 Index is the source of the earnings cycle. He advised clients to stay long on U.S. technology stocks on expectations for profits to further accelerate in the first half of this year and to stay long on industrial stocks on re-shoring and redistribution of global supply chains.

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