Pressure mounted on stocks as three major technology giants experienced declines, leading traders to navigate through conflicting economic data ahead of Jerome Powell's congressional testimony. Equities faltered following a previous rally, raising apprehensions about overvalued mega-cap stocks and exposing the sector to significant fluctuations in response to adverse developments.
Apple Inc. faced worsening iPhone challenges in China, Advanced Micro Devices Inc. encountered obstacles in selling an artificial intelligence chip to Asian nations. Tesla Inc. continued its decline as shipments to China plummeted.
Tech Stocks Face Overextended Risks
Citigroup Inc.'s Chris Montagu warns that bullish positioning in US technology stocks has reached its highest point in three years, posing a potential risk for a pullback. Montagu states long positioning in Nasdaq 100 futures is "extremely extended." Kenny Polcari from SlateStone Wealth adds, "Trees don't grow to the sky," expressing concerns among investors about whether tech companies with stretched valuations can meet the expectations set by investors.
Additionally, Wall Street considers data indicating a cooling in the US service sector despite improvements in orders and business activity. As Federal Reserve chief Jerome Powell prepares for his semiannual testimony before Congress, caution prevails, with expectations that he will reiterate the lack of urgency to cut rates.
Markets React: Tech Bubble Debate
The S&P 500 experienced a 1% decline, whereas the Nasdaq 100 faced nearly double the setback. Tesla sustained an 11% drop over two days, and Apple recorded its fifth consecutive loss. On a positive note, Nvidia Corp. witnessed an increase. Treasury 10-year yields decreased by six basis points, settling at 4.15%. Bitcoin, following a record-breaking surge surpassing $69,000, saw a decline. Simultaneously, gold reached an unprecedented high.
This surge has prompted strategists to hastily adjust their 2024 targets, sparking debates on whether the tech sector is undergoing a legitimate boom or entering a speculative bubble.
Marko Kolanovic from JPMorgan Chase & Co. interprets the remarkable rally in US equities and Bitcoin as a sign of accumulating froth, indicative of conditions that typically precede a bubble when asset prices escalate at an unsustainable pace. Conversely, David Kostin at Goldman Sachs Group Inc. contends that fundamental factors substantiate the elevated valuations in big tech.
According to Bloomberg's compiled data, the so-called Magnificent Seven witnessed a remarkable 55% increase in average earnings per share during the fourth quarter compared to the previous year. This group significantly drove the Nasdaq 100 to its fourth consecutive monthly gain.
The AI craze is a modern gold rush and the tech picks and shovels companies are seeing earnings explode as companies buy chips and cloud space to fuel the boom
Tom Essaye, founder of the Seven Reports.
Tech Allocations, Valuations, and Fed Concerns
As generative AI emerges as the decade's growth theme, UBS's Chief Investment Office maintains that a significant portion of investors' equity allocations should be in US tech stocks. Yet, the firm suggests diversifying tech exposure for those with excessive exposure to seize upcoming growth opportunities.
The top five companies in the S&P 500 currently trade at multiples below half of the 'Four Horsemen'—Intel Corp., Cisco Systems Inc., Microsoft, and Dell Technologies Inc.—back in March 2000 when their forward price-to-earnings ratios exceeded 80, as reported by BI.
Valuations in accelerating technology themes, including AI, finance, cloud, and robotics, seem relatively controlled, with most trading at or below five-year average price-to-sales multiples. While asserting that US stocks are not in a bubble, analysts acknowledge the potential for one to form later in 2025, especially with a possible Fed easing cycle and attention-grabbing new technologies.
Nicholas Colas from DataTrek Research suggests delaying rate cuts as a precautionary measure. Concerns arise about the impact of the AI frenzy and expectations for 2024 rate cuts, warning of potential disappointment if projections do not materialize.