Around the time the tech bubble burst, Albert Edwards was very nearly assaulted during a meeting for suggesting that “much of the growth universe was in fact industrial cyclicals masquerading as growth stocks”.
“I cannot express just how controversial these views were in 2000 at the end of the TMT bubble”, Edwards writes, in a note out Thursday. “The pushback was fantastically hostile, and I remember one meeting when my former colleague and Chief Economist, Ian Harwood intervened to save me from being punched”.
It’s at least possible, Albert admits, that his would-be assailant was angry about something that “had nothing to do” with tech stocks. One can only imagine.
Anyway, no one has tried to punch Albert recently (or at least not that he remembers), but he does “see strong echoes with 2000” in today’s equity market.
One thing that’s got him concerned is the disconnect between the market and underlying corporate profits. Here’s a visual on that with a similar juxtaposition from 2000 circled for ease of use. 
(SocGen)
IT stocks in the US (both hardware and software) have outperformed the broad market handily, but that outperformance is “devoid of EPS support”, Albert warns.
(SocGen)
This is a movie we’ve seen before. “IT sector outperformance raced well ahead of its relative earnings growth in the late 1990s”, Edwards reminds you, on the way to noting that “in the eye of the tech bubble, analysts increased LT EPS projections to justify the nose-bleed PE valuations, so they could maintain their buy ratings”.
Needless to say, the ensuing recession laid bare the folly of that absurd exercise in goal-seeking.
Ultimately, Edwards thinks that may be on the verge of playing out again. It’s at least possible that the proliferation of “smart” beta vehicles and other “innovations” in factor investing have blurred the lines between styles, exacerbating the situation Albert warns about in his Thursday missive.
Obviously, Growth stocks have been en vogue amid falling bond yields and recession worries, but if the cycle turns, you’d better hope your “Growth” names don’t turn out to be cyclicals in disguise. (There are plenty of Cinderella jokes about midnight and pumpkins you can make here.)
“The unfolding profits recession will expose the growth imposters and they will collapse, as they are on the wrong growth PE valuations with the wrong EPS projections”, Edwards says, adding that “just like in 2001, investors will not wait to distinguish true growth stocks from the imposters”.
Instead, folks will simply “slam the whole sector and work it out later”.
And Amazon fell….
It took years of excess for the bubble to finally burst in 2001.
The pertinent question to ask is how close are we to the moment of truth.
The key difference is the Fed. If the Fed were raising rates right now and if there were any threat of inflation, Albert would be spot on, but the Fed is currently going the other direction, and inflation seems to have gone the way of the Norwegian Blue.