Source: Cai Lian She Author: Liu Rui
① US tech stocks have experienced significant pullbacks in the past two days. Chief strategist at BNP Paribas warns that this decline may not be temporary, but may be the start of a further decline in tech stocks. ② The current valuation of US tech stocks has inflated to 35% of the total market value of the S&P 500 index, the highest proportion of technology stocks in the benchmark index since the early 21st century.
After months of continuous rise led by technology stocks, this upward trend seems to have taken a turn in the last two days.
On Wednesday, NASDAQ composite index fell sharply by 2.77% in US Eastern time, gapping down below the 30-day moving average. On Thursday, the index continued to decline by 0.7%, which made investors smell a hint of danger.
One of Wall Street's most pessimistic analysts warns that the current decline may not be temporary, but may be the start of a further decline in technology stocks.
BNP Paribas warns: the technology stock bubble is about to burst
On Thursday, Albert Edwards, chief global strategist at BNP Paribas, warned that the technology stock boom in the US might soon come to an end.
As a veteran of Wall Street, Edwards has been warning of the risks of US economic recession and a stock market bubble burst for months. Previously, he predicted that investors might soon suffer losses similar to those in the dot-com bubble at the beginning of this century.
"Over time, there are few people left in this industry who were there during the 2000 Nasdaq crash, let alone the crash of 1987. But I was there at that time, and one thing I learned was not to be complacent. Bad things will happen, and if you look carefully, the warning signals are already there." Edwards said in a report on Thursday.
Overvalued is a warning signal.
Edwards pointed out that the current high valuation of US tech stocks is an important warning signal given by the market.
The current valuation of US tech stocks has inflated to 35% of the total market value of the S&P 500 index, the highest proportion of technology stocks in the benchmark index since the early 21st century. The last time the valuation of US tech stocks reached such a high level was just before the burst of the tech stock bubble at the beginning of this century.
At the same time, Edwards believes that Wall Street analysts have overestimated the future profits of technology stocks. Currently, analysts expect the future profit growth of US tech stocks to increase by about 30%. However, according to Edwards, this performance growth rate is expected to be only about 20%.
Under this background, Edwards believes that the expected price-earnings ratio (PE) of US tech stocks currently looks 'high': the expected PE of technology stocks is about 32 times, compared with the slightly higher than 20 level of the S&P 500 index. This indicates that 'the valuation of IT stocks is a timed bomb'.
"To what extent is this enthusiasm for EPS growth similar to the excessive investment in cables by the US telecommunications industry under the guidance of 'free' funds in the late 1990s? We may soon find the answer." Edwards wrote, "What will crush this tech bubble? It may only take a slight drop in the optimistic sentiment of EPS growth for this bubble to burst."
Mike Wilson, chief equity strategist at Morgan Stanley, who shares similar views with Edwards, recently stated that the expected profit of US corporate earnings is expected to weaken later this year and predicts that the stock market may soon experience a 10% correction.
Editor/Lambor