Tech Surge Sends Valuations to Extremes, but Traders Don't Care
Comment of the Day

April 24 2023

Commentary by Eoin Treacy

Tech Surge Sends Valuations to Extremes, but Traders Don't Care

This article from Bloomberg may be of interest to subscribers. Here is a section:

Tech stocks in the S&P 500 are trading at almost 25 times prospective earnings. To justify such a multiple, the Fed would need to cut rates by at least 300 basis points, data compiled by Bloomberg Intelligence show. That’s more than five times what the swaps market is pricing in for rate cuts this year. 

“Traders are betting on a big about-face in the Fed’s interest-rate policy, but there is no certainty as to whether, and when, this will happen,” said Quincy Krosby, chief global strategist at LPL Financial. “Longer-term, the sector’s growth prospects are attractive, but not at the current valuations.” 

A bleak earnings outlook for tech companies supports the skepticism. Analysts expect a 15% slump in the sector’s first-quarter profits — the third-largest decline among the S&P 500’s 11 industry groups, data compiled by Bloomberg Intelligence show.

Eoin Treacy's view

The most fervent hope of investors is we are going back to the good old days of permanently low interest rates, where the There Is No Alternative (TINA) market persists indefinitely. The challenge is that inflationary pressures are still conspicuously firm. If the Fed cuts rates by 300 basis points, which I believe is likely, that will be in response to a significant growth shock. Technology earnings are unlikely to be immune to that kind of development.

That’s the primary reason I continue to hold a Nasdaq-100 short position. The S&P500 Information Technology Index has floated higher on enthusiasm that artificial intelligence will be the solution to every problem. I’m as impressed by the technology as anyone and I was delighted to be invited by the MIT Technology review to attend their upcoming conference on AI. I am looking forward to learning about both the possibilities and the limitations of the technology.

The S&P500 Information Technology Index has a very similar pattern to the Nasdaq for obvious reasons. It has rallied to break the yearlong sequence of lower rally highs but has paused over the last three weeks. Nvidia has been the go-to stock for playing AI enthusiasm and it is still trending higher. That relative strength is a clear vote of confidence that AI will survive any recession. 

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