Are Tech Stocks in a Bubble?

Harry MamayskyAdvisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

Tech stocks are not in a bubble for two reasons. Not all stock price booms result in busts, and fundamentals and valuations do not suggest a tech bust is imminent.

This is part I of an analysis of whether tech stocks are in a bubble. Here I discuss whether large price run-ups in stocks are necessarily followed by large declines. (They are not.) In part II (to appear next week), I will look at the fundamentals and valuations of the tech sector as of mid-2023 to see whether a rational evaluation of the evidence suggests U.S. tech stocks are in a bubble. (It does not.)

Setting the stage

After a rough 2022, technology stocks have had a heck of run in 2023, leading to the inevitable speculation about whether we’re headed for a new stock market bubble in tech. Some have gone from speculating to asserting that the bubble is already here. Let’s define a “bubble” as a large but unjustified increase in the price of an asset, like a stock (or a tulip). To detect bubbles before they burst, we therefore need to identify cases of large price increases or booms (easy) and then determine that they are unjustified (hard).