US stock turbulence sheds light on Big Tech valuations
A heavy wave of selling in US stocks is highlighting the valuations of technology names such as Nvidia and Microsoft, which have driven markets higher for most of this year. Despite a recent decline, the technology sector of the S&P 500 is trading at 29.5 times estimated 12-month earnings, near the highest point in two decades reached earlier this month.
The overall market is also historically high, with the benchmark S&P 500 index trading at 20.7 times expected earnings estimates, compared with the long-term average of 15.7, LSEG Datastream data show. “Markets today are pretty expensive for us on a broad level,” said Philip Straehl, chief investment officer, Americas, at Morningstar Wealth.
Market participants were happy to pay more for tech and growth stocks for most of 2024, as excitement over the business potential of artificial intelligence spurred rallies in companies such as chipmaker Nvidia, whose shares are up nearly 130% this year. Recent market action shows that investors are more wary of richly valued stocks. Results from Tesla and Alphabet staggered shares earlier this week, sending the S&P 500 and Nasdaq Composite Wednesday to their biggest daily losses since 2022.
Results from megacaps Amazon, Apple, Microsoft and Facebook parent Meta Platforms are expected in the coming week, raising the stakes for investors who have plunged into large tech and tech-related stocks. Increased valuations may also cause investors to divest shares as markets face turbulence from other sources, such as changes in expectations that the Federal Reserve will cut interest rates in the coming months and the political risk of an already dramatic presidential race.
American companies are facing high financial expectations: second-quarter earnings for the S&P 500 are expected to have risen 12.1% from a year earlier, according to LSEG IBES. Of the 206 companies that released results so far, 78.6% reported profits above analysts’ expectations, which is in line with beating the past four quarters.
While investors await earnings reports, some warn that high valuations could lead to disappointment if market expectations are not met. “The bar is pretty high for these tech stocks,” said Chuck Carlson, chief executive officer at Horizon Investment Services. “People really still need to be impressed. And if you don’t, you’re vulnerable to a sell-off.”
Some say the high valuations support the case for a rotation trade in which investors liquidate their large-cap tech stocks and switch to small caps, value stocks and other areas that have delivered tepid returns for most of the year. Since July 10, the small-cap Russell 2000 is up 10%, while the S&P 500 is down 3%.
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