Tackling Technology’s “Earnings Elephant” – the Great Grift Continues

Note: the most important chart for tech investors today is on page three…and it is not complicated.

Our last white paper on tech, The Troubles of 2025 are on Full Display, demonstrated that:

• Technology’s share of total market cap has eclipsed the prior peak in the dot com bubble
• Technology’s bloated market cap has come, in no small part, from multiple expansion
• No matter if we use price to sales or free cash flow yields, US tech is deep in bubble territory

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Now.  For the elephant in the room.  Earnings.  This is the argument for why “this time is different.”

Tech bulls will tell you that, unlike in the dot com bubble, today the biggest tech stocks are profitable.  We agree.

Let’s take a look at the data and see if we might convince you that faith in eternally high profit margins is a recipe for disaster.  The chart below shows the Tech sector’s share of total corporate earnings.

While the share was relatively modest and stable through the early 2000s, it experienced a sharp collapse around the dot com bust and has since trended steadily upward. Tech now accounts for just over 30% of the market’s total earnings, reflecting a large increase in its contribution to aggregate corporate profitability

Continuing to look at the chart above, when the mortgage bubble imploded in 2008 it collapsed the profits of many other sectors in the economy, causing Technology’s share of total profits to spike sharply.  We saw the same phenomenon during Covid.

In the post 2003 period then, technology has been an earnings fortress with profits seemingly impervious to exogenous shocks.

So, Technology stocks now represent 40% of the weight in the S&P 500 benchmark [2] and roughly a third of the total earnings in the US stock market.   That sounds reasonable until you look at the dot com experience.

By the end of the dot com bubble, tech represented 16% of the market’s total profits, as seen on the prior page.  Yet this profits boom was an illusion created by money-losing startups that purchased vast quantities of products from big tech companies.

The demand for technology equipment from loss-making startups created an illusion of robust and rising profits at the larger tech firms.  In response, technology companies ramped spending on engineers, salespeople and advertising known as “SG&A”.  The chart below shows that