1997, dot-com, and today's market.

October 17, 2025

I don't love historical business comparisons as they relate to markets. They're used to sell books about market crashes and euphorias, but there are too many significant variables that change over time for the analogies to be worth much predictively.

A lot of people are asking One Day In July advisors if we are worried given the high price-to-earnings ratio of the S&P 500, now exceeding the top of the dot-com bubble. This is only one asset class in which we invest, but let's ignore that detail. Yes, it is expensive, but investors have concluded that business is robust and growing. And there were trillions of dollars printed that have to go somewhere. Eventually some of them reach the bond and stock markets.

Let's rewind to 1997. The movie Titanic was skyrocketing, unlike its eponymous boat which was not so fortunate, and Michael Jordan & Scottie Pippen still liked each other, at least enough to cooperate on court. More quietly, the market's price-to-earnings ratio was rising:

Jan 1, 1995: 14.89
Jan 1, 1996: 18.08
Jan 1, 1997: 19.53

People were getting worried in 1997 about this. The tech bubble was emerging and the sock puppet of pets.com hadn't even made an entrance yet. There was talk that it was time to sell and harbor the ship from the coming storm.

The storm did happen, and no amount of chatter from Sock Puppet could calm it. The S&P 500 declined 47.4% from the top of dot-com to the post-9/11 bottom in 2003, and that included dividends (the price drop was 49.1%).

But if you had reacted in 1997... you probably would not have been happy. For three more years the S&P 500 continued its inexorable rise, with a price-to-earnings ratio that peaked at 29.04. At the top, surgeons were day-trading between procedures, pontificators were declaring the end of work, and Wall St. analysts decided U.S. dollars didn't matter, that eyeballs on web pages were the new currency (I'm not going to draw any analogies to crypto here).

Now here's the problem. As the market ripped up, you were on the sidelines. From 1997 to the top three years later, your calm neighbor who was not worrying about the market but was busy composting her coffee into her petunia flower beds doubled her money, while you and your accountant were figuring out how to pay the tax bill on your trade. While the cash had the benefit of being less volatile, this drip drip of underperformance has the tendency to break someone at just the wrong time, so you may have re-entered the market a few years later... at the top.¹

By the year 2000, Neighbor Petunia had room to take some losses versus you. So even if the market comes down a lot, which it did, it went up a lot before that. Here's how it worked out over a decade, starting at the beginning of 1997 with $100,000. The dark green line is the S&P 500, the blue area is a diversified blend of 80% S&P 500, 20% small-cap (Russell 2000), and the gray area is how cash performed:

You can see that it's a fool's errand. There is no way to know when to get out, and there is no way to know when to get in. A small group can make a lot of money selling books that scare people or get them excited. For everyone else, don't try to time the peaks and valleys.

~ Dan Cunningham

Notes:
1. Technically: "At the top... and without the tax money you paid."
2. S&P decline source: Morningstar Sources for P/E multiples. Multpl.com and Shiller
3. Graph data source: Yahoo Finance and ODIJ Research. Daily effective funds rate is used for cash. Daily rebalancing assumed in the 80%/20% portfolio. Total return assumed (dividends included). One Day In July LLC does not guarantee actual returns or losses. Past performance does not guarantee future returns. Returns vary based on start and end dates selected. Returns presented do not take into consideration any taxes, investment fees, or inflation.