Would be interesting to see how investors’ expectations were measured? Expectations are difficult to measure, requires to be active participant of the market, talk to investors all the time (ECM teams in investment banks do that), and do the investor sentiment surveys, polls and indexes. Well there are also some indirect measures of expectations like yield curve etc., but let’s not go there at this moment.

For information, here is Addepar investor sentiment index:

https://www.addepar.com/assets/investor-sentiments/September-2020/september-monthly-investor-analysis.pdf

But to the point of the article, I would argue that during dot-com bubble stocks were more aligned with investors’ expectations than today.

The dot-com bubble happened because those expectations were delusional and based on very unsound analysis and misunderstanding of the “new economy” of internet era. So the prices were there with the expectations level, it is just those expectations were not based on sound judgement.

Over last 4-5 years we had several important factors which besides investors’ expectations, have been influencing stock prices

First is record low interest rate environment causing investors’ desperation: we saw massive switch from fixed income to equities, as equities are the only asset class earning anything. the allocation to stocks by pension funds and life insurers increased by a lot. Those investors buying the stocks do not necessarily believe the pricing levels are right, but they don’t have much other choice. This also caused huge surge in allocation to PEs, VCs and alternatives.

Seconds is quantitative easing: Almost $3 trillion printed recently by US government needs to go somewhere and as fixed income yields are negligible, it mostly finds itself in equities.

Now I am not making predictions what will happen. I do not necessarily say that currently market is more mispriced, as although the weight of expectations in price formation is lower today, the quality and realism of those expectations theoretically can be higher.

But I would still argue that the prices were more aligned with investors’ expectations during dot-com bubble than they are today.