BANK OF AMERICA: 'This is not your parents' tech bubble'

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For stock enthusiasts, drawing parallels between the current market and the dot-com bubble is a pretty common activity.

But Bank of America Merrill Lynch doesn't buy into those comparisons at all.

It thinks the tech-driven stock rally is far more stable this time around — and that the reason stretches far beyond valuation.

"This is not your parents' tech bubble," Savita Subramanian, BAML's chief US equity and quantitative strategist, wrote in a client note.

The firm cites the robust levels of cash held by tech companies, which should only grow if President Donald Trump's proposed repatriation tax holiday goes into effect. In fact, tech is the only sector in the S&P 500 index that carries more cash than debt on corporate balance sheets.

In another contrast to the '90s bubble, the proportion of investment funds with a tech focus is half of what it was around 2000. Further, tech initial public offerings now make up a far smaller portion of the market, according to BAML.

A side-by-side analysis in BAML's table provides more data showing that the S&P 500 is less reliant on tech than it was in 2000 and that the sector is more profitable and less debt-laden nowadays:

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That's not to say everything is perfect for tech stocks. BAML recognizes there are still some major risks to the sector's red-hot rally and holds just an "equal weight" — or neutral — rating.

First and foremost, tech is an extremely crowded sector. It has almost been a victim of its own success in that sense, as investors have piled into proven winners. BAML found that long-only relative tech exposure was at its highest since 2008.

Because of this, "institutional investors may be more likely to sell than to buy," Subramanian said.

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And while tech's weighting is smaller than it was in 2000, it recently crossed a key threshold. It sits at roughly 24% of the S&P 500, above the 20% level that has historically preceded underperformance over the following 12 months, BAML's data shows.

Another element to consider is that hedge funds have started to turn their backs on tech — to a degree. While the industry remains crowded, they're the most bearish in more than 16 months on the sector. It's worth noting that they're still net positive and that this decline in sentiment is just relative to recent history.

Overall, it's clear that the debate over whether to keep buying tech stocks will rage on — but that conditions now are far from as scary as they were in the tech bubble.

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