The Stock Market Just Did Something It Hasn't Done Since the Dot-Com Bubble in 1998. Here's What Could Happen in 2025.

The S&P 500 has surged to record highs in recent years, with the index up over 23% in 2024 alone. However, the market has also experienced some volatility, with the index dropping more than 2.5% in December 2024. This recent decline has raised concerns about a potential market correction or even a new bubble. But how does this compare to the dot-com bubble of 1998, and what could happen in 2025?



First, let's look at the valuations and price-to-earnings ratios. During the dot-com bubble, the average P/E ratio for tech companies was around 100, with some companies like Pets.com and Webvan trading at P/E ratios of over 500. In contrast, as of 2024, the average P/E ratio for tech companies in the S&P 500 is around 28.5, which is significantly lower than the peak during the dot-com bubble. However, the China Securities Index 300 has a price-to-earnings ratio of around 220 times reported profits, which is high but still lower than the peak during the dot-com bubble.

Next, let's consider investor sentiment and speculative behavior. While investor sentiment is high, the current market performance and returns do not necessarily indicate a bubble like the dot-com bubble. The S&P 500 has not experienced the same extreme volatility or growth as during the dot-com bubble, and the use of dollar-cost averaging has resulted in lower, but still substantial, returns. Additionally, the first year of President-elect Donald Trump's second term in the White House holds promise for the stock market, with the best year for market returns historically being the first year of a presidential term.



Now, let's examine the performance of initial public offerings (IPOs) and special purpose acquisition companies (SPACs). During the dot-com bubble, the average return for IPOs was around 70%, compared to around 15% in 2024. The number of IPOs in recent years has also been lower than during the dot-com bubble, with 217 IPOs in 2024 compared to 406 in 2000. However, the total capital raised by IPOs in recent years has been lower as well, with $42.4 billion raised in 2024 compared to $97.1 billion in 2000.



In conclusion, while the S&P 500 has surged to record highs in recent years, the current situation does not necessarily qualify as an asset price bubble like the dot-com bubble of 1998. Valuations and price-to-earnings ratios are lower, investor sentiment is high but not extreme, and the performance of IPOs and SPACs has not reached the same heights as during the dot-com bubble. However, it is essential to remain vigilant and monitor the market closely, as the situation can change rapidly. As an investor, it might make sense to consider a balanced approach, combining both growth-oriented and defensive investments to navigate potential market volatility in 2025.