Why We're Staying at the Tech Party

• Tech stocks trade at only a 10% premium to the S&P 500 despite superior growth, with the MSCI USA Information Technology Index at 23x forward earnings compared to 40x at the 1999 peak
• Free cash flow for US tech is approaching $1 trillion annually and running above EBIT, the opposite of the 1999 bubble when EBIT climbed while cash flow lagged behind
• Expected IPO supply of roughly 100 deals in 2026 remains well below historical extremes (250 in 2021, 400 in 1999), with Goldman Sachs expecting buybacks and M&A to offset new equity issuance

Market Summary: Tech Sector Outlook Remains Positive Despite Bubble Concerns

Key Investment Position: RiverFront Investment Group maintains an overweight position in U.S. technology stocks despite growing investor concerns about 1999-style bubble conditions and recent market volatility.

Valuation Analysis:

• MSCI USA Information Technology Index trades at approximately 23x forward earnings versus 40x at the 1999 dot-com peak
• Current tech valuation represents only ~10% premium to S&P 500, despite stronger growth
• Tech profit margins now exceed 26% compared to 13% in 1999
• The firm concludes investors are "paying a lot less in 2026 for better businesses"

Critical Indicator - Cash Flow:

The primary bubble warning signal—divergence between EBIT and free cash flow—is not present. Tech sector free cash flow currently runs above EBIT at nearly $1 trillion annualized, approaching multiples of 2000 levels. This contrasts sharply with 1999-2000 when EBIT significantly outpaced cash flow, indicating deteriorating earnings quality.

Market Context:

• Iran conflict keeping energy prices elevated with interest rates remaining high
• Softer-than-expected core CPI print provides reassurance on inflation
• Nasdaq experienced healthy -5% drawdown on June 5
• SpaceX IPO represents recent supply concerns

IPO Supply Assessment:

• Expected 100 IPOs in 2026 versus 250 in 2021 and 400 in 1999
• SpaceX's $75B issuance is small relative to $65T S&P 500 market cap
• Goldman Sachs expects buybacks and M&A to offset new equity supply
• $8T in money market liquidity available to absorb issuance

Conclusion: The firm will maintain tech overweight until free cash flow begins trailing EBIT—the key signal for bubble conditions—which is not currently flashing.