The German stock market has been experiencing an unprecedented bull market for many months. Driven by strong US stock markets, and now hopes of a radical economic recovery after the change of government in Germany, the Dax in particular has advanced at breakneck speed. And even small caps are gradually gaining traction.

The Dax broke through the 23,000 point mark for the first time last week. on Monday. Before that, however, it had already stumbled somewhat, which was probably due to some investors gasping for breath in the high altitude air. Some may have been reminded of a historic price collapse at the beginning of March 25 years ago: The dotcom bubble, for many the bubble of all bubbles, began to burst. The peak of euphoria on the stock markets was reached on March 10, 2000. From that point on, dotcom and tech stocks went downhill massively for the next two and a half to three years.

The meltdown was massive, and its dimensions came as a complete surprise to the children of the bull market. The US tech index Nasdaq fell from 4,700 points to under 1,000 points in late summer 2002, the T-share, which had risen from an issue price of 14.57 euros in November 1996 to a price of more than 100 euros in early March 2000, collapsed to under 10 euros in October 2002. And the Dax lost more than 70% from its high of more than 8,000 points in March 2000 to its low of 2,300 points in March 2002.

Accounting manipulations such as those at Worldcom and Enron came to light. On the German stock exchange's „Little Nasdaq“, the Neuer Markt, several cases of fraud were uncovered, such as at Comroad. The party was over and Deutsche Börse eventually closed its Neuer Markt, which had turned into something of a gambling venue. Many private investors lost their trust in the stock markets when the bubble burst.

From today's perspective, however, investors are particularly interested in what the reasons for the dotcom bubble were, and why it burst so violently. In addition, the question naturally arises as to whether, given the high price gains of US technology stocks, and in particular the Magnificent 7 (Mag7), a new bubble has not been forming here.

„Looking back, what is most striking is that there was no fundamental driver for the start of the sell-off,“ commentes Henry Allen, macro strategist at Deutsche Bank Research, in a recent study on the bursting of the dotcom bubble. When things got serious, selloffs simply led to further selloffs, as has been the case with many financial bubbles in history. There was no need for a major catalyst at the beginning. A bubble can therefore burst out of nowhere if a sufficiently high valuation level has built up, and an extremely large amount of risk capital has been invested.

The term dotcom bubble was associated with the rise of numerous young internet companies around the turn of the millennium. Allen notes that this was also accompanied by strong growth, tax cuts for capital gains in the USA, and key interest rate cuts by the Fed.

Then, as Allen explains, the bubble took on a life of its own in 1999, when venture capital brought many Internet companies to the stock market, and the technology exchange Nasdaq gained a whopping 86% that year, so that US stocks reached record valuations. The cycle-adjusted price-earnings ratio (CAPE) of the S&P 500 climbed to an all-time high of 44.2 in December 1999. This was even higher than the level in 1929 before the big stock market crash. At the same time, when the economy threatened to overheat, the Fed raised key interest rates by 25 basis points three times, in June, August and November 1999.

In January and February, the Nasdaq rose significantly again, so that the bubble reached its peak. When the bubble burst, there were repeated attempts to stabilise it. But when the economic slowdown became apparent and many companies reported weak earnings figures, the sell-off continued. In retrospect, it is clear that the dotcom rally ultimately led to a massive overvaluation of tech stocks.

Compared to today, however, strategist Allen recognises key differences. „First, the speed of the original rise in tech stocks was far greater than today's rally,“ he explains. The Nasdaq climbed 88% in five months to its high in March 2000. In contrast, the rise in 2024 was „only“ 29%. Second, the dynamics of the original slump were incredibly sudden and significant. Such severe setbacks have not been seen so far, even after key events such as the announcement of Deep Seek's new AI model, when the Nasdaq only lost 3% from its high.

„Thirdly, the sell-off took place in the context of a broad economic downturn,“ says Allen. Today, however, the US economy is growing steadily.

However, the Mag7 in particular are highly valued, while European and Asian stocks are much cheaper. Ariel Bezalel, fund manager at Jupiter, sees an overvaluation of US stocks. Several characteristics show this. The „Buffett indicator“ (named after Warren Buffett), which compares US market capitalisation to GDP, is close to its all-time high. The price-earnings ratio (P/E) of the S&P 500 also appears very high, especially the cycle-adjusted P/E ratio (CAPE). In addition, a simple model shows that a risk premium for stocks that is too high is currently not justified.

Is there a bubble in the Mag7 too? There are at least signs of it.