Why another tech wreck doesn’t have to spell disaster for investors

The echoes of the dot-com crash are suddenly impossible to tune out.

For a couple of years now, the implosion of tech stocks in the early-2000s has never been far from investors’ minds. Now, the dreaded sequel is threatening to unfold. And all because of Jensen Huang’s dangerous liaison with a suspected Chinese spy.

The scandal engulfing the former Nvidia Corp. NVDA-Q CEO, who many consider the chief architect of the artificial intelligence revolution, has set off a convulsion in the tech sector that puts the broader stock market in peril.

Until about a month ago, Nvidia was the world’s largest publicly traded company. Its stock has now dropped by 32 per cent from its peak, wiping out roughly US$2-trillion from the company’s market value. That loss alone is nearly seven times the size of Royal Bank of Canada RY-T, the largest stock on the TSX.

And since Nvidia is a life force in the AI ecosystem, the company’s unravelling presents a systemic risk to financial markets.

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There is a clear ripple effect taking shape. Neocloud stocks, which are cloud operators for the AI space, are down 40 to 50 per cent from their October peaks. Semiconductor stocks have lost about 25 per cent. The Nasdaq Composite Index is off almost 10 per cent. And we’re seeing the early signs of contagion to the stock market at large.

It’s a dangerous moment for investors. But whether or not this is the year 2000 all over again, one key fact of the original tech wreck is largely forgotten. While technology and communication stocks got obliterated, the rest of the stock market held up surprisingly well.

You may need to read that twice. But it’s true. The dot-com bust wasn’t the universal disaster for stocks it’s commonly perceived to be. That’s a lesson today’s investors may need to relearn.

Cast your mind back to early 2000, a time of frosted tips, flip phones, and rampant stock speculation. The turning point came in March, when dot-com ventures with no path to profitability started to run out of cash. The Nasdaq Composite went on to drop by almost 80 per cent over the next two-and-a-half years, and it was another 13 years before the tech-heavy index got back to its pre-crash high.

It was carnage for TSX investors as well, with the Canadian benchmark index losing half its value.

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To a generation of investors, it sure didn’t seem like the fallout was at all contained. But that’s mainly because of how major stock market indexes are constructed. The S&P/TSX Composite Index, like the Nasdaq Composite or the S&P 500, is what’s known as a cap-weighted index. It means larger stocks have a bigger influence on the index’s performance.

At the peak of the dot-com bubble, the tech sector had risen so much, it accounted for about one-third of the S&P 500. So, a reckoning for technology meant the undoing of the stock market itself.

The Canadian market was even more concentrated at the time. At the peak of its power, Nortel Networks Corp. alone made up more than one-third of the Canadian benchmark index. Nortel’s catastrophic fall, which reduced it from behemoth to penny stock in just a couple of years, was like an anchor dragging down the entire market.

Hidden beneath the headline pain was everything that worked well, of which there was plenty. The folks at Bespoke Investment Group recently published a chart on X showing that the average U.S. stock was up by more than 5 per cent from the end of 1999 to the end of 2001. “An often overlooked aspect of the dot-com crash is that stocks not tied to the internet and mobile build-out did quite well for a long stretch,” the firm said.

The big Canadian banks also held up well, for example. So did the energy sector.

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Which brings us to today. For the average investor, the biggest risk lies in the index, just like it did 25-plus years ago. Tech stocks make up a 37-per-cent weighting in the S&P 500 – triple the size of the next biggest sector. Communications stocks account for another 8 per cent. Plus, some major AI players, such as Amazon.com, Inc. AMZN-Q, reside in the consumer sectors.

A simple way to limit one’s exposure, while remaining invested, may be through what’s called an equal-weighted index fund. These products basically treat each individual stock with the same importance, so they’re not as easily pushed around by the biggest names, should they fall on hard times.

There’s also the Canadian stock market as a whole to consider. We don’t have a Nortel to worry about this time around. The TSX has just a 9-per-cent weighting in technology, and most of that is Shopify Inc SHOP-T.

As damaging as the dot-com crash was, it was also survivable. If history is any guide, investors shouldn’t assume the sequel will be a market-wide catastrophe.