US stock turbulence throws spotlight on Big Tech's valuations
By Lewis Krauskopf
NEW YORK, July 29 (Reuters) -A bruising selloff in U.S. stocks is putting a sharper focus on valuations of the tech names such as Nvidia and Microsoft that have driven markets higher for most of this year.
Despite a recent pullback, the S&P 500 tech sector .SPLRCT is trading at 29.5 times 12-month earnings estimates, near a two-decade high reached earlier this month. The overall market is also elevated historically, with the benchmark S&P 500 index .SPX trading at 20.7 times forward estimates, compared to its long-term average of 15.7, data from LSEG Datastream showed.
"Markets today are pretty expensive to us at a broad level," said Philip Straehl, chief investment officer, Americas, at Morningstar Wealth.
"That just creates some opportunity for disappointment," he said, pointing to high market expectations of a soft landing for the U.S. economy and for individual company performances.
Market participants were happy to pay up 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 NVDA.O, whose shares are up nearly 130% this year.
Recent market action shows investors becoming more wary of richly valued stocks. Earnings results from Tesla TSLA.O and Alphabet GOOGL.O staggered stocks earlier this week, dealing the S&P 500 and Nasdaq Composite .IXIC their biggest daily losses since 2022 on Wednesday. Both indexes remain solidly higher in 2024, up 14.5% and 15.6%, respectively, despite sharp declines since mid-July.
Results from megacaps Amazon AMZN.O, Apple AAPL.O, Microsoft MSFT.O and Facebook parent Meta Platforms META.O are due in the coming week, raising the stakes for investors who piled into large tech and tech-related shares.
Elevated valuations could also lead investors to unload stocks if markets face turbulence from other sources, including changes in expectations the Federal Reserve will cut interest rates in coming months and political risk from an already-dramatic presidential race.
U.S. companies overall face lofty financial expectations, with S&P 500 earnings expected to have climbed 12.1% in the second quarter from a year earlier, according to LSEG IBES. With 206 companies posting results so far, 78.6% reported profits above analyst expectations, in line with the beat rate of the past four quarters.
"The market's going to be looking for pretty stellar results, given how much valuation re-rating has happened," said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management.
Many investors will focus on the tech sector and the so-called Magnificent Seven megacaps that are heavily weighted in the S&P 500 and Nasdaq. An example of the market’s recent mood shift was reflected in the reaction to Alphabet’s earnings: the company’s shares slumped 8% over the past three sessions, as investors grew concerned that investments in AI infrastructure would squeeze margins, even though revenues topped expectations.
"The bar is pretty high for those tech stocks," said Chuck Carlson, chief executive officer at Horizon Investment Services. "People really still need to be wowed. And if you're not wowing, then you're kind of vulnerable to a sell-off."
The spotlight will shine on Apple and Microsoft, the two biggest U.S. companies by market capitalization, both valued at over $3 trillion.
Apple is trading at 30 times earnings estimates, well above its five-year average of 25.5 and 10-year average of 19.6, according to LSEG Datastream. At 31 times, Microsoft is above its five-year average P/E of 29 and 10-year average of nearly 25.
Some say lofty valuations support the case for a rotation trade that has seen investors liquidate their large-cap tech stocks and move into small caps, value stocks and other areas that had produced tepid returns for most of the year.
Since July 10, the small-cap Russell 2000 .RUT is up 10% while the S&P 500 has dropped 3%.
"We think investors will continue to rotate away from expensive tech names as (earnings) growth returns elsewhere," analysts at Oxford Economics said in a note on Friday.
To be sure, not all tech and megacap stocks may seem expensive, particularly after the recent market slide. Meta Platforms, for example, is trading at 20.6 times forward estimates, compared to its 10-year average of 25.
More broadly, valuations remain far lower than the early 2000s, around the dot-com bubble, when the tech sector's P/E ratio reached 48 times.
At the same time, better-than-expected results could bolster the case for tech stocks' elevated valuations and give investors a much-needed confidence boost.
Analysts at UBS Global Wealth Management noted on Thursday that S&P 500 earnings growth is on pace for its biggest rise in over two years. They expect the S&P 500 to end the year at 5,900, some 8% above current levels.
"Investors should be prepared for periodic market dips," the UBS analysts said. "However, we continue to expect the S&P 500 to recover."
Tech sector valuation over time https://tmsnrt.rs/4fuhTSG
The Magnificent Seven https://reut.rs/46kmP8s
Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and Anna Driver
අදාළ වත්කම්
නවතම පුවත්
වියාචනය: XM Group සමාගම් ක්රියාත්මක කිරීම පමණක් වන සේවා සපයන අතර වෙබ් අඩවියේ හෝ වෙබ් අඩවිය හරහා ලබා ගත හැකි අන්තර්ගතය බැලීමට සහ/හෝ භාවිත කිරීමට පුද්ගලයෙකුට ඉඩ සලසමින් අපගේ මාර්ගගත වෙළඳ පහසුකම වෙත ප්රවේශය ලබා දෙන අතර වෙනස් කිරීමට හෝ පුළුල් කිරීමට අදහස් නොකරයි. එවැනි ප්රවේශය සහ භාවිතය සෑම විටම (i) නියමයන් සහ කොන්දේසි, (ii) අවදානම් අනතුරු ඇඟවීම් සහ (iii) සම්පූර්ණ වියාචනයට යටත් වේ. එබැවින් එවැනි අන්තර්ගතයක් සාමාන්ය තොරතුරුවලට වඩා වැඩි යමක් සපයා නොමැත. විශේෂයෙන්ම, අපගේ මාර්ගගත වෙළඳ පහසුකමේ අන්තර්ගතය පෙළඹවීමක් හෝ මූල්ය වෙළඳපොළවල කිසිදු ගනුදෙනුවක් සිදු කිරීමට ඉදිරිපත් කිරීමක් නොවන බව කරුණාවෙන් සලකන්න. ඕනෑම මූල්ය වෙළඳපොළක වෙළඳාම් කිරීම ඔබේ ප්රාග්ධනයට සැලකිය යුතු අවදානමක් එක් කරයි.
අපගේ මාර්ගගත වෙළඳ පහසුකමේ ප්රකාශිත සියලු කරුණු අධ්යාපනික/තොරතුරුමය අරමුණු සඳහා පමණක් අදහස් කෙරෙන අතර මූල්ය, ආයෝජන බදු හෝ වෙළඳ උපදෙස් සහ නිර්දේශයන්; හෝ අපගේ වෙළඳ මිල පිළිබඳ වාර්තාවක්; හෝ ඕනෑම මූල්ය උපකරණයක ඉදිරිපත් කිරීමක් හෝ ඒ සඳහා පෙළඹවීමක්; හෝ විශේෂ ඉල්ලීමකින් තොරව ඔබ වෙත ලබා දෙන ලද මූල්ය ප්රවර්ධනයන් ලෙස නොසැලකිය යුතුය.
ඕනෑම තෙවන පාර්ශවීය අන්තර්ගතයක් මෙන්ම XM විසින් සකසන ලද අන්තර්ගතය එනම් අදහස්, පුවත්, පර්යේෂණ, විශ්ලේෂණ, මිල ගණන් සහ වෙනත් තොරතුරු හෝ මෙම වෙබ් අඩවියේ අන්තර්ගත තෙවන පාර්ශවීය වෙබ් අඩවි සඳහා සබැඳි සාමාන්ය වෙළඳපොළ විවරණයක් ලෙස "පවතින පරිදි" සපයා ඇති අතර එහි ආයෝජන උපදෙස් ඇතුළත් නොවේ. ඕනෑම අන්තර්ගතයක් ආයෝජන පර්යේෂණයක් ලෙස අර්ථ දක්වා ඇති ප්රමාණයට, ආයෝජන පර්යේෂණයේ ස්වාධීනත්වය ප්රවර්ධනය කිරීමට නිර්මාණය කර ඇති නෛතික අවශ්යතාවලට අනුකූලව අන්තර්ගතය සකසා නොමැති බවත් එලෙස අරමුණු කර නොමැති බවත් ඔබ සලකා පිළිගත යුතු අතර එබැවින් එය අදාළ නීති සහ රෙගුලාසි යටතේ අලෙවිකරණ සන්නිවේදනයක් ලෙස සලකනු ලැබේ. ඉහත සඳහන් තොරතුරු සලකා මෙතනින් ප්රවේශ විය හැකි, ස්වාධීන නොවන ආයෝජන පර්යේෂණ සහ අවදානම් අනතුරු ඇඟවීම පිළිබඳ අපගේ දැනුම්දීම ඔබ කියවා තේරුම් ගෙන ඇති බව සහතික කර ගන්න.
