Warnings that the tech-fueled stock rally had gone too far had been ringing out for weeks. And for weeks, equity bulls pushed the likes of Nvidia Corp. higher, confident that artificial intelligence growth and an on-hold Federal Reserve would help justify nosebleed valuations.
That thesis — or at least the Fed part of it — got rocked Tuesday, when hot inflation data all but vanquished expectations for rate cuts before midyear. A day after the Nasdaq 100 popped above 18,000 for the first time, investors are once again grappling with what the prospect of higher-for-longer interest rates means for tech valuations that are back at levels exceeded only during the pandemic-era rebound and the dot-com bubble.
The Nasdaq’s 1.6% slide Tuesday was only the worst in two weeks, and a measure of implied volatility on the index remained firmly in calm territory. But the prospect of sticky inflation leaves bulls clinging to a Goldilocks scenario that sees the American economy continue to thrive — without generating pricing pressures that force the Fed back into rate hikes.
“The market was vulnerable,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott. “We’ve seen valuations expand far more than was warranted by earnings, and prices had become somewhat demanding. The reaction might be excessive given this is just one data point, but maybe not relative to the state of valuations and how much we’ve moved off the October low.”
The Nasdaq 100 rallied 27% from late October through Monday, pushing the benchmark’s price relative to projected profits above 25. Microsoft is priced at 32 times while cybersecurity company Palo Alto Networks Inc. is above 60 and software maker Cadence Design Systems Inc. is around 50. Bank of America strategists warned the runup echoed the surge just before the dot-com blowup. Other money managers, joined that chorus.
Of course, the other engine powering tech stocks — profit expansion — is still chugging along. Analysts fretted that earnings estimates were too elevated heading into the fourth-quarter reporting season, only to watch as most of the big tech names blew past them. Estimates for earnings growth this year for the biggest seven have risen to about 24% from 22% at the end of 2023, according to data compiled by Bloomberg Intelligence.
“A change in Fed policy expectations doesn’t take away tech’s long-term growth drivers,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute.
But, he added, given the market setup, with equities hitting records and signs that the rally has pushed too far, too quickly, there may be more pain in the coming days and weeks.
“Over the short term, trading is more about sentiment and valuation, and both of those have been running pretty hot,” Samana said. “It is hard to keep up with lofty valuations. I don’t know that Tuesday is by itself enough to take the full air out of the tire. But it is fair to say we’re stretched. Things have been getting pretty frothy.”
For Barry Knapp, managing partner at Ironsides Macroeconomics, it all comes down to profits. And while some cracks did emerge in the AI bulwark, they have so far not been big enough to be worrisome.
“So long as estimates continue to go up, valuations will stay rich,” he said. “I don’t really like it, I struggle to pay at these levels, but I’m not a zealot about it and if revisions were moving lower I’d be a lot more concerned.”
Tech Chart of the Day
Top Tech News
- ASML Holding NV said the semiconductor market has reached its nadir and there are now are signs of a rebound.
- Lyft Inc. issued a massive correction to its outlook for earnings margin in 2024, saying its margin is expected to expand by 50 basis points — not the 500 basis points written into an earnings presentation released earlier on Tuesday.
- Japanese producers of chipmaking equipment are capitalizing on surging demand from China, catapulting their shares to new heights while helping build out a tech supply chain the US has warned may be a threat to global security.
- Sony Group Corp. said it will list its financial arm in October 2025, prepping a major capital infusion after the media conglomerate cut the forecast for its core gaming division.
- Rakuten Group Inc. scrapped its dividend payout to shore up finances hurt by five straight years of losses stemming from its fledgling mobile unit.
- Apple Inc.’s longest-serving senior industrial designer is leaving the company, marking the near-complete turnover of a team once led by Jony Ive.
Earnings Due Wednesday
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